UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-K
|
| |
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended November 28, 2014December 1, 2017
|
| |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-15175
ADOBE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
_____________________________
|
| |
Delaware (State or other jurisdiction of incorporation or organization) | 77-0019522 (I.R.S. Employer Identification No.) |
345 Park Avenue, San Jose, California 95110-2704
(Address of principal executive offices)
(408) 536-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
| |
| Title of Each Class | Name of Each Exchange on Which Registered |
| Common Stock, $0.0001 par value per share | The NASDAQ Stock Market LLC (NASDAQ Global Select Market) |
Securities registered pursuant to Section 12(g) of the Act: None
_____________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,filer”, “accelerated filer”, “smaller reporting company”, and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | |
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o | Emerging growth company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the registrant’s common stock, $0.0001 par value per share, held by non-affiliates of the registrant on May 30, 2014June 2, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, was $24,153,080,560$52,575,558,763 (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and director and each person who owns 5% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of January 16, 201512, 2018, 498,314,061491,578,529 shares of the registrant’s common stock, $0.0001 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant’s 20152018 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed within 120 days of the end of the fiscal year ended November 28, 2014December 1, 2017, are incorporated by reference in Part III hereof. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
ADOBE SYSTEMS INCORPORATED
FORM 10-K
TABLE OF CONTENTS
|
| | |
| | | Page No. |
| PART I | |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| | | |
| PART II | |
| Item 5. | | |
| Item 6 | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| | |
| PART III | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
| | | |
| PART IV | | |
| Item 15. | | |
| | | |
| |
| |
| |
Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements, including statements regarding product plans, future growth, market opportunities, strategic initiatives, industry positioning, revenue growth, customer acquisition and retention, the amount of recurring revenue and revenue growth, eachgrowth. 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 which involvethe 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 I, 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 U.S. Securities and Exchange Commission (“the SEC”(the “SEC”), including our Quarterly Reports on Form 10-Q to be filed in 2015. 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.2018. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document, except as required by law.
PART I
ITEM 1. BUSINESS
Founded in 1982, Adobe Systems Incorporated is one of the largest and most diversified software companies in the world. We offer a line of products and services used by creative professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing and engaging with compelling content and experiences across multiple operating systems,personal computers, devices and media. We market and license our products and services directly to enterprise customers through our sales force and certain local field offices. We license our products to end-usersend users through app stores and our own website at www.adobe.com. We offer many of our products via a Software-as-a-Service (“SaaS”) model or a managed services model (both of which are referred to as a hosted or cloud-based model)cloud-based) as well as through term subscription and pay-per-use models. We also distribute certain products and services through a network of distributors, value-added resellers (“VARs”), systems integrators (“SIs”), independent software vendors (“ISVs”), retailers, software developers and original equipment manufacturers (“OEMs”). In addition, we license our technology to hardware manufacturers, software developers and service providers for use in their products and solutions. Our products run on personal and server-based computers, as well as on smartphones, tablets and other devices, depending on the product. We have operations in the Americas, Europe, Middle East and Africa (“EMEA”) and Asia-Pacific (“APAC”). See Note 1817 of our Notes to Consolidated Financial Statements for further geographical information. Adobe was originally incorporated in California in October 1983 and was reincorporated in Delaware in May 1997. We maintainOur executive offices and principal facilities are located at 345 Park Avenue, San Jose, California 95110-2704. Our telephone number is 408-536-6000 and our website is www.adobe.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC website at www.sec.gov. The information posted to our website is not incorporated into this Annual Report on Form 10-K.
BUSINESS OVERVIEW
For over 3035 years, Adobe’s innovations have transformed how individuals, teams, businesses and governments communicate and interact. Across these markets, weWe help our customers create and deliver the most compelling content and interactive experiences in a streamlined workflow, and optimize those experiences and marketing activities for greater return on investment. Our solutions turn ordinary interactions into valuable digital experiences, across media and devices, anywhere, anytime.anytime, anywhere.
While we continue to market and licenseoffer a broad portfolio of products, services, and solutions, we focus our investments in two strategic growth areas:
Digital Media—Media—providing tools,products, services and solutions that enable individuals, small and medium businessesteams and enterprises to create, publish and promote their content anywhere. Our customers include content creators, web designers, app developers and digital media professionals, as well as management in marketing departments and agencies, companies and publishers. Our customers also include knowledge workers who create, collaborate and distribute documents. This is the core of what we have delivered for over 2025 years, and we have evolved our business model rapidly to provide theseour customers with a more complete and integrated workflow across the varietyrange of new devices, formats and business modelsflexible solutions that continueallow them to emerge.reach their full creative potential anytime, anywhere, on any device on projects of all types.
Digital Marketing—Experience—providing solutions and services for creating, managing, executing, measuring and optimizing digital advertisingmarketing and marketingadvertising campaigns across multiple channels. Our customers include marketers, advertisers, agencies, publishers,
merchandisers, web analysts, marketing executives, information management executives, product development executives, and sales and support executives. We process over twenty-fiveIn fiscal 2017, we processed 186 trillion data transactions a year viawith our SaaSanalytics products, providing our customers with analytics, social,
targeting, media optimization, digital experience management, cross-channel campaign management, and video solutions. This complements our digital media franchise, bringing together the art of creating and managing contentDigital Media business with the science of measuring and optimizing it, enablingour Digital Experience offerings, we help our customers to achievemore efficiently and effectively make, manage, measure and monetize their optimal business outcomes.content across every channel with an end-to-end workflow and feedback loop.
We believe we are uniquely positioned to be a leader in both the Digital Media and Digital Marketing categories,Experience markets, where our mission is to change the world through digital experiences. By integrating products from each of these two areas of Adobe’s business, our customers are able to utilize a comprehensive suite of solutions and services that no other entitycompany currently offers. In addition, our ability to deliver innovation and productivity improvements across customer workflows involving the creation, management, delivery, measurement and optimization of rich and engaging content favorably positions Adobe as our customers invest more to engagecontinue investing in engaging their constituents digitally.
SEGMENTS
OurEffective in fiscal 2018, our business is organized into three reportable segments: Digital Marketing,Media, Digital MediaExperience (formerly Digital Marketing), and Publishing (formerly Print and Publishing.Publishing). These segments provide Adobe’s senior management with a comprehensive financial view of our key businesses. Our segments are aligned around the company’sour two strategic growth opportunities described above, placing our Print and Publishing business in a third segment that contains manysome of our mature products and solutions.
PRODUCTS AND SERVICESMARKET OVERVIEW
Digital Media
Digital Media Opportunity
Recent technology trends in digital communications including ever increasing data speeds that enable greater usage by consumers of mobile devices and tablets to access online content and services, continue to provide a significant market opportunity for Adobe in digital media. DueIn today’s world where the velocity of creation and consumption of digital content is ever increasing, customers are looking for a way to the increase in rich media consumed in digital environments and the rise of online social communities, themeet demand for digital media tools and solutions to createwith engaging online experiences is higher than ever.experiences. Adobe is in a uniquestrong position to capitalize on this opportunity by delivering rapiddriving modernization and innovation to increase our customer reach,that will accelerate the creative process across all platforms and devices, deepen engagement with communities, and accelerate long-term revenue growth by focusing on a cloud-based model where our products and solutionsofferings, which are licensed on a subscription basis.
The flagship of our Digital Media business is Adobe Creative Cloud—a subscription service that allows members to use Adobe’s creative products integrated with cloud-delivered services across desktop, web and mobile devices. Creative Cloud members can download and installaccess the latest versions of our creative products such as Adobe Photoshop AdobeCC, Illustrator AdobeCC, Premiere Pro CC, Lightroom CC, InDesign CC, Adobe Photoshop LightroomXD CC and Adobe InDesign, as well as utilize other tools such as Adobe Acrobat.many more creative applications. In addition, members can access built-in templates to jumpstart designs and step-by-step tutorials to sharpen skills and get up to speed quickly. Through Creative Cloud, members can also access online services to sync, store, and share files participate inacross users’ machines, access marketplace, social and community-based features within our Adobe Stock and Behance community of more than four million creative professionals, publishservices, and deliver digital content via app stores, develop mobilecreate apps and create and manage websites. websites, all at affordable subscription pricing for cost-sensitive customers.
Adobe is redefiningcontinues to redefine the creative process with Creative Cloud so that our customers can obtain everything they need to create, collaborate and deliver engagingbe inspired. A core part of our strategy is Adobe Sensei, a proprietary framework and set of intelligent services for dramatically improving the design and delivery of digital content.experiences. Adobe Sensei leverages Adobe’s massive content and data assets, as well as its deep domain expertise in the creative, marketing and document segments, within a unified artificial intelligence (“AI”) and machine learning framework to tackle today’s complex creative experience challenges.
Creative Cloud addresses the needs of creative professionals including graphicsuch as artists, designers, production artists, web designers and developers, user interface designers, videographers, motion graphic artists, prepress professionals, video game developers, mobile application developers, students and administrators. They rely on our solutionsproducts for publishing, web design and development, video and animation production, mobile app and gaming development, and document creation and collaboration. End users of our creative toolsproducts work in businesses ranging from large publishers, media companies and global enterprises, to smaller design agencies, small and medium-sized businesses and individual freelancers. Moreover, our creative products are used to create much of the printed and online information people see, read and interact with every day, including video, animation, mobile and advertising content. Knowledge workers, educators, hobbyists and high-end consumers
also use our products to create and deliver creative content.
In addition to Creative Cloud, our Digital Media business offers many of the We have introduced new products, included in Creative Cloud on a standalone basis, including subscriptions to the Creative Cloud version of certain point products, and also offers a range of other creative toolsfeatures and services including our hobbyist productsto address emerging categories of content creation such as 3D, augmented reality, virtual reality and user experience design. New solutions include Adobe Photoshop ElementsDimension, a tool that enables the creation of high-quality, photorealistic 3D images; Adobe XD, a solution for creating user experiences and screen designs as part of designing websites and mobile apps; and Adobe Premiere Elements, Adobe Digital Publishing Suite, Adobe PhoneGap, Adobe TypekitSpark, a set of capabilities that enables anyone to create impactful graphics, web pages and mobile apps such as Adobe Photoshop Mix, Adobe Photoshop Sketch and Adobe Premiere Clip that run on tablets and mobile devices. Further descriptions of our Digital Media products are included below under “Principal Products and Services”.video stories in minutes.
Adobe’s Digital Media segment also includes our Document ServicesCloud business, built around our Acrobat family of products, the Adobe Acrobat Reader and a set of integrated, cloud-based document services. Tens of millions of knowledge workers worldwide interact with documents daily. For over two decades25 years, Adobe Acrobat has provided for the reliable creation and exchange of electronic documents, regardless of platform or application source type. Users can collaborate on documents with electronic comments and tailor the security of a file in order to distribute reliable Adobe PDF documents that can be viewed, printed or filled out utilizing our free Adobe Acrobat Reader. Acrobat provides essential electronic document capabilities and services to help knowledge workers accomplish a wide rangevariety of tasks ranging from simple publications and forms to mission-critical engineering documentation and architectural plans. With our Acrobat XI product and its innovative cloud services, we have extended the capabilities of our solution.solutions. Users can take advantage of electronic documentturn slow, manual signing processes into automated experiences and collect signatures with Adobe EchoSign, complete form management withScan, Adobe FormsCentral,Sign and utilize other features such as Adobe CreatePDF, ExportPDF and Acrobat.com.Send & Track.
Digital Media Strategy
Our goal is to be the leading providerplatform for creativity where we offer a range of toolsproducts and services that allow individuals, small and medium businessesteams and enterprises to create, publishdesign and monetize their content anywhere.deliver amazing digital content.
We believe there is significant opportunity for growth across all customer segments and expect Creative Cloud a subscription service with attractive monthly pricing, will be a catalyst fordrive sustained long-term revenue growth in the coming years. The monthly subscription pricing model is attractive to users of older versionsthrough a continued expansion of our products who desirecustomer base by acquiring new users in North America and international markets. We will continue to useseek to deepen our latest releasesrelationship with existing users through meeting their needs holistically and services, but who in thedelivering additional features and value. As appropriate, we plan to optimize our pricing strategy and move our customers to higher priced and better value offerings and continue to employ targeted promotions that attract past have been unwillingcustomers and potential users to upgradetry out and ultimately subscribe to newer versions due to price sensitivity. Similarly, we are gainingCreative Cloud. To target new customers and expect to continue to drive new user adoptionbetter address the needs of our creative tools business over the next several years outside of our core creative professional targeted market because of the attractive monthly subscription pricing combined with the strong brand of our creative tools and the broad value proposition provided by Creative Cloud. We anticipate that our sustained focus on a subscription modelexisting customers, we will continue to invest in driving innovation to maintain the leadership position that we have established. We have also built 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 the amount of our revenue with users, attract more new customers, and grow a recurring and predictable revenue stream that is ratably reported, driven by broader Creative Cloud adoption over the next several years.
To accelerate the adoption of Creative Cloud, we have focused on migrating existing users of our creative products from perpetual licenses to the subscription offering, as well as driving new customer adoption. Aspects of this strategy include: focusing future innovation by our engineering teams on delivering new cloud-based functionality, such as Creative Cloud Libraries, Adobe Shape CC and Adobe Brush CC, to enable our customers to use our creative tools and services across a variety of devices in ways that are not possible with previous desktop versions; increasing the value of Creative Cloud by delivering frequent product updates and enhancements to subscribers to address their content creation challenges; using promotions to attract customers to the offering; expanding our go-to-market reach through channel partners to reach new customers; and utilizing Creative Cloud for teams and Creative Cloud for enterprise offerings to drive broad adoption with customers who license our products in volume.recognized ratably.
As part of our Creative Cloud strategy, we plan to utilize our digital marketingExperience Cloud solutions to drive customer awareness and licensing of our creative products and improve conversion onservices through our website and across other channels. Adobe.com is increasingly becoming the destination site where we engage individual and small business customers to sign up for and renew Creative Cloud subscriptions. We utilize affiliate and channel partners to target mid-size creative customers with our Creative Cloud for teams offering. Our direct sales force is focused on building relationships with our largest customers and driving adoption of our Creative Cloud for enterprise offering.
We offer many of the products included in Creative Cloud on a standalone basis, including subscriptions to the Creative Cloud version of certain point products. We also offer a range of other creative tools and services, including our hobbyist products such as Photoshop Elements and Premiere Elements, Typekit and mobile apps such as Photoshop Mix, Photoshop Sketch, Photoshop Fix, Adobe Capture CC, and Adobe Spark. Further descriptions of our Digital Media products are included below under “Principal Products and Services.”
In our Document ServicesCloud business, although Acrobat has achieved strong market adoption in document-intensive industries such as government, financial services, pharmaceutical, legal, aerospace, insurance and technical publishing, we believe there are tens of millions of users who still need the capabilities provided by Acrobat.Acrobat and the service capabilities found in Document Cloud. We plan to continue to marketmarketing the benefits of our Document ServicesCloud solutions, combined with the low entry point of subscription-based pricing, to individuals as well as small and medium-sized businesses, large enterprises and government institutions around the world andworld. We aim to increase our seat penetration in these markets through the utilization of our corporate and volume licensing programs. We will continue to engage in strategic partnerships to help drive the business, including the recently announced Adobe Sign partnership with Microsoft. We also intend to increase our focus on marketing and licensing Acrobat in targeted vertical markets such as education, financial services, telecommunications and government, as well as on expanding into emerging markets, while simultaneously enhancing and building out the delivery of cloud-based document services to our Acrobat and Adobe Acrobat Reader users. We intend to continue to promotepromoting the capabilities of our cloud-based EchoSign solutiondocument solutions to millions of Acrobat users and hundreds of millions of Adobe Acrobat Reader users. EchoSign providesOur Adobe Sign services provide a green alternative to costly paper-based solutions, and isare an easier way for customers to manage their contract workflows. The Adobe Scan app for mobile devices can be used to capture paper documents as images and transform them into full-featured PDFs via Adobe Document Cloud services that can be shared immediately, essentially putting scanning capabilities in the pocket of every person. We believe that by growing the awareness of EchoSignelectronic signatures in the broader contract delivery and signing market and continuing to add new capabilities
to our Adobe Scan and Sign offerings, we can help our customers migrate away from paper-based express mailing and adopt our solution, growing our revenue with this business in the process.
Digital MarketingExperience
Digital MarketingExperience Opportunity
Consumers today increasingly demand personalized content and experiences in their onlinedigital interactions, across multiple channels and devices. As a result, businesses or any entity with an online presence must figure out how to best attract, engage, acquire and retain customers in a digital world where the reach and quality of experiences directly impactsimpact success. Delivering the best
experience to a consumer at a given moment requires the right combination of data, insights and content. Marketing executivesExecutives are increasingly demanding solutions that optimize their consumers’ experiences and deliver the greatest return on their marketing and IT spend so they can demonstrate the success of their programs using objective metrics.
We believe there is a significant opportunity to address these challenges and help customers transform their businesses. Chief Marketing Officers (“CMOs”), digital marketers, advertisers and publishersThe world’s leading brands are increasingly steering their marketing, advertising, and advertisingdevelopment budgets toward digital media.experiences. As theyenterprises make this move to digital, our market opportunity is accelerating as customers look for vendors to help them navigate this transition. However, marketing in a digital world is not simply about executing campaigns in each digital channel. Marketers, and entire enterprises, alsoEnterprises need to ensure they deliver meaningful experiences to their consumers across both digital and traditional channels and in areas such as sales, support, and product interactions where consumers expect experiences to be consistent and personalized.
Our Digital MarketingExperience Cloud business targets this large and growing opportunity by providing comprehensive solutions that include analytics, social marketing, targeting, mediaadvertising optimization, digital experience management, and cross-channel campaign management, as well asaudience management, premium video delivery and monetization. We deliver these capabilities through our Adobe Marketing Cloud, an integrated offering enablingThese comprehensive solutions enable marketers to measure, personalize and optimize marketing campaigns and digital experiences across channels for optimal marketing performance. With its broad set of solutions, including Adobe Analytics, Adobe Target, Adobe Social, Adobe Media Optimizer, Adobe
We believe the market for Experience ManagerCloud is rapidly expanding, and Adobe Campaign, as well as real-time dashboards and a collaborative interface, customers of Adobe Marketing Cloud are able to combine data, insights andindustry analysts predict more advertising dollars will be spent in digital content to deliver a personalized brand experience to their consumers.
With the increasethan in traditional media in the number of consumers that watch premium video content via the web on PC, tablet and mobile devices, the monetization of video delivery is an emerging opportunity within Adobe Marketing Cloud. To address this opportunity, we have worked closely with video content owners and distributors to develop and deliver Adobe Primetime, a modular platform that enables a more complete workflow to meet our customers’ needs in areas such as video publishing, advertising and analytics. We believe customers using our Primetime solution can drive greater audience engagement, resulting in increased revenue from ad sales and subscriptions, while lowering operating costs.
In addition to CMOs and digital marketers, users of our Adobe Marketing Cloud solutions include marketing professionals such as search engine marketers, media managers, media buyers and marketing research analysts. Customers also include web content editors, web analysts and web marketing managers. These customers often are involved in workflows that utilize other Adobe products, such as our Digital Media offerings and our video workflow and delivery technologies. By combining the creativity of our Digital Media business with the science of our Digital Marketing 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.
Our Digital Marketing segment also contains two legacy enterprise software offerings: our Adobe Connect web conferencing platform and Adobe LiveCycle, an enterprise document and forms platform. At the beginning of fiscal year 2012 we narrowed the focus of marketing and licensing of these products to financial services and government markets, driven by a subset of our enterprise sales force.future.
Digital MarketingExperience Strategy
Our goal is to be the leading provider of marketing solutions that enable our customers to provide exceptional digital experiences. Our integrated cloud-based solutions enable enterprises to build personalized campaigns, manage advertising, and a standardgain deep intelligence about their customers. Our content and data platform provides differentiation and competitive advantage.
In March 2017, we migrated our hierarchy of solutions under what was formerly known as Adobe Marketing Cloud to our next generation offering referred to as Adobe Experience Cloud.
Adobe Experience Cloud consists of the following cloud offerings:
Adobe Marketing Cloud—provides an integrated set of solutions to help marketers differentiate their brands and engage their customers, helping businesses manage, personalize, and orchestrate campaigns and customer journeys; includes Adobe Experience Manager (“AEM”), Adobe Campaign, Adobe Target and Adobe Primetime.
Adobe Analytics Cloud—enables businesses to move from insights to actions in real time by uniquely integrating audiences as the core system of intelligence for the wayenterprise; makes data available across all Adobe clouds through the capture, aggregation, rationalization and understanding of vast amounts of disparate data and then translating that data into singular customer profiles; includes Adobe Analytics and Adobe Audience Manager.
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 marketing is measured, managed, executedscreens; combines capabilities from Adobe Media Optimizer (“AMO”) and optimized.Adobe’s acquisition of TubeMogul during the first quarter of fiscal 2017.
We believe thatthe artificial intelligence and machine learning framework enabled by our success will be driven by focusing our effortsstrategy with Adobe Sensei enhances the delivery of digital experiences. By building on making the Adobe Marketing Cloud the most comprehensive and integrated marketing solution available. Adobe Marketing Cloud consists of six key solutions-Adobe Analytics, Adobe Target, Adobe Social, Adobe Media Optimizer, Adobe Experience Manager and Adobe Campaign-as well as Adobe Primetime, the industry’s leading online TV delivery platform. Adobe Marketing Cloud provides marketers with key capabilities,existing features such as Enhanced Anomaly Detection, Auto-Target, and other capabilities, we believe Adobe Sensei will increase the ability to:
Combine data across the Adobe Marketing Cloud solutionsvalue we provide our customers and third-party data sources, such as customer relationship management, point of sale, email, and survey, to create a single view ofcompetitive differentiation in the consumer;
Deliver personalized customer experiences across channels and on any device;
Use predictive analytics to enable marketers to utilize past marketing program data and success to predict and drive their future success with digital marketing programs;
Access all Adobe Marketing Cloud solutions from one centralized platform and visualize, socialize, and collaborate across teams with the interface;
Interact with creatives through integration with Creative Cloud, enabling content creators and marketers to collaborate and communicate in real time within a cloud-based platform;
Accurately forecast and continually optimize their mix of campaigns across digital media;
Provide robust cross-channel campaign management capabilities utilizing real-time insights, rich customer data and a sophisticated automation and execution platform;
Manage, publish, track, and monetize social programs;
Store, assemble, and distribute digital assets to deliver high-quality brand, campaign, and content experiences;
Easily add, alter, and deploy marketing tags on websites, resulting in consistent page performance and accurate data collection; and
Integrate with over 200-plus partners in 20-plus countries, covering the expansive digital marketing ecosystem.market.
To drive growth of Adobe MarketingExperience Cloud, we also intend to streamline how customers learn about, acquirefocus on customer engagement, partner leverage, and deploy Adobe Marketing Cloud solutions.product differentiation. We believe we can accelerate the growth of our business by continuing to build out moreutilize a direct sales capacity,force to market and license our Experience Cloud solutions, as well as continuing to enable a richan extensive ecosystem of partners, including marketing agencies, SIs and systems-integrators who sellindependent software vendors that help license and servicedeploy our solutions.solutions to their customers. Strategic partnerships, such as the one we have formed with Microsoft, continue to increase our
market reach. We have made significant investments to broaden the scale and size of all of these routes to market, and believe these investments will result in continued growth in revenue in our Digital MarketingExperience segment in fiscal 20152018 and beyond.
Print and Publishing
Our Print and Publishing segment contains legacy products and services that address diverse market opportunities including eLearning solutions, technical document publishing, web application development and high-end printing. Graphics professionals and professional publishers continue to require quality, reliability and efficiency in production printing, and our Adobe PostScript and Adobe PDF printing technologies provide advanced functionality to meet the sophisticated requirements of this marketplace. As high-end printing systems evolve and transition to fully digital, composite workflows, we believe we are uniquelywell positioned to be a supplier of software and technology based on the PostScript and Adobe PDF standards for use by this industry.
We generate revenue by licensing our technology to OEMs that manufacture workflow software, printers and other output devices. In fiscal 2014,2017, we maintained a relatively consistent quarterly revenue run-rate with the mature products we market and license in our Print and Publishing business.
PRINCIPAL PRODUCTS AND SERVICES
In December 2017, in order to more closely align our Digital Media Products
Creative Cloud
Creative Cloud is a subscription offering which significantly improves how creative professionals create rich and engaging content. It leverages shifts in the industry so that users can easily explore, create, publish and share their work across devices, the desktop and the web. With Creative Cloud membership, users have access to a vibrant global creative community, publishing services to deliver apps and websites, cloud storage to easily access their work, the ability to sync their files to virtually any device, collaboration capabilities with team members, and new products and exclusive updates as they are developed.
Creative Cloud members can build a Creative Profile which persists wherever they are. A user's Creative Profile moves with them via Creative Cloud services from app-to-app and device-to-device, giving them immediate access to their personal files, photos, graphics, colors, fonts, text styles, desktop setting customizations and other important assets.
New Creative Cloud services have been developed and delivered to subscribers to increase the utilization of Creative Cloud capabilities beyond the use of our desktop applications. New services include: Content, which provides users easy access to stock content; Libraries, an asset management service; and Creative Talent Search, connecting users with job opportunities and hiring managers. We believe services such as these will drive higher user interaction with Creative Cloud and create upsell opportunities as users increasingly utilize higher-tiered versions of such services.
New mobile apps which run on tablets and smartphones enable connections between essential Creative Cloud desktop tools and a new family of mobile apps that extend the capabilities of Photoshop, Illustrator, Premiere Pro and Lightroom onto mobile devices. A new category of “capture” apps was also delivered, enabling users to create designs with tablets and bring them into their creative workflows.
We license Creative Cloud to individuals and teams of users through Adobe.com either on a monthly subscription basis or as an annual subscription. Channel partners also license Creative Cloud with annual team subscriptions to small or medium-sized businesses, or to workgroups in enterprises. With larger enterprise customers, our direct sales force utilizes enterprise term license agreements (“ETLAs”), for volume-based agreements often for multi-year terms.
Photoshop
Photoshop is the world’s most advanced digital imaging software. It is used by photographers, designers, web professionals, and video professionals, and is available to Creative Cloud subscribers. Customers can also subscribe to Photoshop CC as an individual subscription product, or through our Creative Cloud Photography Plan which is an offer targeted at photographers and photo hobbyists and includes our popular Photoshop Lightroom product as a companion tool to Photoshop. We also offer Photoshop Elements separately, which is targeted at consumers who desire the brand and power of Photoshop through an easy-to-use interface. For tablet and phone users, we offer several mobile apps including Photoshop Sketch, Photoshop Mix, Lightroom Mobile and more—all of which enable sophisticated photo editing and content creation using a touch-based interface on tablet and mobile devices.
Illustrator
Illustrator is our industry-standard vector graphics software used worldwide by designers of all types who want to create digital graphics and illustrations for all kinds of media: print, web, interactive, video, and mobile. Illustrator is available to Creative Cloud subscribers, and customers can also subscribe to use it as an individual subscription product. Users can also utilize mobile apps such as Illustrator Draw (formerly Adobe Ideas) and Illustrator Line to gain access to Illustrator capabilities on their tablets and mobile devices, and sync their work through Creative Cloud services for use with Illustrator on their desktop.
InDesign
InDesign is the leading professional page layout software for print and digital publishing. Our customers use it to design, preflight, and publish a broad range of content including newspapers and magazines for print, online, and tablet app delivery. Customers can create simple or complex layouts quickly and efficiently with precise control over typography, built-in creative tools, and an intuitive design environment. Tight integration with other Adobe software such as Photoshop, Illustrator, Acrobat, and Adobe Flash Professional enables customers to work productively in print and digital workflows. Customers can also access Adobe Digital Publishing Suite from within InDesign to create and publish engaging apps for a broad range of devices, including iOS, Android and Amazon-based devices.
InDesign is built for designers, prepress and production professionals, and print service providers who work for magazines, design firms, advertising agencies, newspapers, book publishers, and retail/catalog companies, as well as in corporate design, commercial printing, and other leading-edge publishing environments. Customers using InDesign often use Adobe InCopy, a companion product used for professional writing and editing to enable an efficient collaborative workflow between design and editorial staff. InDesign and InCopy are available to Creative Cloud subscribers, and customers can also subscribe to use InDesign as an individual subscription product.
Adobe Premiere
Adobe Premiere is our powerful, customizable, nonlinear video editing tool used by video professionals. Customers can import and combine virtually any type of media, from video shot on a phone to raw 5K and higher resolution footage, and then edit in its native format without transcoding. The user interface includes a customizable timeline and numerous editing shortcuts which enable faster, keyboard-driven editing.
With the demands of shorter production schedules and high-resolution digital media formats, real-time performance is crucial to videographers. Premiere utilizes our Mercury Playback Engine to provide the fastest performance solution in the industry. It also supports a vast majority of formats, and customers can now use multiple GPU cards to accelerate render and export times. As part of Creative Cloud, Premiere tightly integrates with other Adobe creative applications. Customers can also subscribe to use it as an individual subscription product.
To address the increase in use of video capture and sharing on mobile devices, we offer Premiere Clip, which provides users with easy-to-use features to quickly edit and enhance video. We also offer an Elements version of Premiere, which is a powerful yet easy-to-use video-editing software for home video editing. Premiere Elements provides tools for hobbyists to quickly edit and enhance video footage with fun effects and transitions and create custom DVDs for sharing video with friends and family.
After Effects
After Effects is our industry-leading animation and creative compositing software used by a wide variety of motion graphics and visual effects artists. It offers superior control, a wealth of creative options, and integration with other post-production applications. After Effects is available to Creative Cloud subscribers, and customers can also subscribe to use it as an individual subscription product.
Dreamweaver
Adobe Dreamweaver is our professional web development software development application used by designers and developers to create and edit HTML websites and mobile apps. Dreamweaver provides a broad range of capabilities for web publishing, enabling online commerce, and providing online customer service and educational content, and includes capabilities for visually designing HTML5 pages, coding HTML5 and application logic. As part of Creative Cloud, Dreamweaver tightly integrates with other Adobe creative applications. Customers can also subscribe to use it as an individual subscription product.
Flash Professional
Adobe Flash Professional provides an advanced development environment for creating interactive content which integrates animations, motion graphics, sound, text and additional video functionality. Content built with Flash Professional is deployed via the web to browsers that run Adobe Flash Player. Flash Professional is available to Creative Cloud subscribers, and customers can also subscribe to use it as an individual subscription product.
Adobe Muse
Adobe Muse is built for designers who want to create and publish HTML websites without writing code. Muse is available to Creative Cloud subscribers, or customers can subscribe to use it as an individual subscription product.
Edge Tools & Services
Our Edge web tools and services include: Edge Animate, a web motion and interaction design tool that allows designers to create animated content for websites, using web standards like HTML5, JavaScript and CSS3; Edge Inspect, an inspection and preview tool that allows front-end web developers and designers to efficiently preview and debug HTML content on mobile devices; Edge Code, a code editor, built on the Brackets open source project, optimized for web designers and developers working with HTML, CSS and JavaScript; Edge Reflow, a web design tool to help users create responsive layouts and visual designs with CSS; Edge Web Fonts, a free web font service for using a growing library of open source fonts on websites and in apps; Typekit, a service that gives designers and developers access to a library of hosted, high-quality fonts to use on their websites; and Adobe PhoneGap Build, a service for packaging mobile apps built with HTML, CSS and JavaScript for popular mobile platforms. Our Edge tools and services are available to Creative Cloud subscribers.
Digital Publishing Suite
Adobe Digital Publishing Suite is a complete solution that enables individual designers, traditional media publishers, large brand organizations, enterprise customers and ad agencies to transform their print publications into interactive digital reading experiences for tablet devices and phones. Consisting of hosted services and viewer technology, Digital Publishing Suite tightly integrates with our Creative Cloud applications for efficient design, distribution, and monetization of a new class of innovative magazines, newspapers, brand loyalty materials, merchandising content, marketing communications, and more. A wide range of media publishers have used Digital Publishing Suite to produce well-known titles. Businesses are also using Digital Publishing Suite to produce corporate publications.
Digital Publishing Suite is offered to enterprise customers, and we also offer the Professional Edition and Single Edition to smaller organizations and individuals.
Typekit
Adobe Typekit is a subscription font service that brings thousands of fonts from foundry partners into one library for quick browsing, easy use on the web or on the user’s desktop, and endless typographic inspiration.
Behance
Behance is the leading free online platform to showcase and discover creative work. Behance ProSite is a personal portfolio site builder that stays in syncExperience business with the user’s projects on Behance and transforms a public Behance portfolio into a fully customized personal portfolio on the user’s URL.
Creative Talent Search
Adobe Creative Talent Search is a service that connects creatives across the globe with job opportunities from top brands and companies. Creative companies and hiring managers have access to powerful new tools to discover and engage with the talent they need.
Acrobat and Document Services
Adobe’s Acrobat line of products is headlined by Adobe Acrobat Pro, which is the industry standard for PDF creation and conversion. Acrobat enables users to create secure, reliable and compact Adobe PDF documents from desktop authoring applications such as Microsoft Officestrategic growth opportunity, we moved two legacy enterprise software graphics applications and more. Use of Acrobat enables automated collaborative workflows with a rich set of commenting tools and review tracking features; includes everything needed to create and distribute rich, secure electronic documents that can be viewed easily within leading web browsers or on computer desktops via the free Adobe Reader.
Acrobat Pro is available to Creative Cloud subscribers. Customers can also license Acrobat Pro or Acrobat Standard (which has a subset of Acrobat Pro features) as individual point products, either on a subscription or perpetual license, as well as other offerings from our Document Services business.
Through Acrobat.com we also offer a set of a cloud-based document and collaboration subscription services which provide simple PDF creation, centralized online file sharing and storage capabilities, and document/contract signing solutions. These services includeDigital Experience segment to Publishing: our Adobe CreatePDF, Adobe ExportPDF and Adobe EchoSign for safe electronic signatures.
All of our document service solutions utilize Adobe Reader, which is our free software for reliable viewing, searching, reviewing and printing of Adobe PDF documents on a variety of hardware and operating system platforms.
Adobe Marketing Cloud Solutions
Adobe Analytics
Adobe Analytics helps our customers create a holistic view of their business by turning consumer interactions into actionable insights. With intuitive and interactive dashboards and reports, our customers can sift, sort, and share real-time information to provide insights that can be used to identify problems and opportunities and to drive conversion and relevant consumer experiences. Adobe Analytics enables web, social, video and mobile analytics across online and offline channels to continuously improve the performance of marketing activities. It also provides the ability to perform advanced ad-hoc segmentation and to integrate data from offline and third-party sources.
Adobe Target
Adobe Target lets our customers test, target and personalize content across multiple devices. With Adobe Target, our customers have the tools they need to quickly discover what gets noticed, what increases conversion, and what keeps consumers coming back for more. Adobe Target paves a path from simple testing to targeting to true segmentation and optimization through A/B and multivariate testing, rules-based targeting and automated decision-making.
Adobe Social
Adobe Social provides marketers a comprehensive solution to build stronger connections through content guided by tangible data. Customers can create more relevant posts, monitor and respond to conversations, measure results, and connect social activities to business results. With Adobe Social, our customers can: manage social content and activities across multiple social networks and profile pages; listen and respond to consumer conversations in real time; create social campaigns; and track performance with integrated analytics.
Adobe Media Optimizer
Adobe Media Optimizer is a powerful ad management platform. Customers get a consolidated view of how their media is performing, along with tools to both accurately forecast and continually optimize their mix of paid campaigns across digital media. Media Optimizer includes cross-channel optimization capabilities, search engine marketing management, and display and social advertising management.
Adobe Experience Manager
Adobe Experience Manager helps customers organize, create, and manage the delivery of creative assets and other content across digital marketing channels, including web, mobile, email, communities and video. It enables customers to manage content
on premise or host it in the cloud, delivering agile and rapid deployment. With this ultimate control of content and campaigns, customers are able to deliver relevant experiences to consumers that help build the customers’ brand, drive demand and extend reach. Adobe Experience Manager includes digital asset management, web content management, integrated mobile app development, enterprise-level forms management, and social capabilities, providing customers with tools enabling users to improve their market and brand perception and provide a personalized experience to their consumers.
Adobe Campaign
Adobe Campaign enables marketers to orchestrate personalized experiences determined by each consumer’s behaviors and preferences. As part of its feature set, it provides visual campaign orchestration, allowing for intuitive design and automated consumer experiences across channels, from one-off campaigns to triggered messages, with a graphically rich interface. Marketers can also integrate consumer data from across marketing channels to develop and deliver more relevant marketing experiences to their consumers. Features also included targeted segmentation, email execution, real-time interaction, and operational reporting to easily see how well campaigns are performing.
Emerging Digital Marketing Solution
Adobe Primetime
Adobe Primetime is a modular platform for video publishing, advertising, and analytics, enabling content programmers and distributors to profit from their video content by making every screen a TV—including PC, smartphone and tablet screens. Primetime consists of the following components: PayTV Pass, a universal system for validating access to pay TV content; DRM, which is digital rights management technology to protect video content from unauthorized copying or access; Ad Insertion, providing for the seamless insertion of ads into live and video-on-demand content; Ad Serving, the ability to determine which ads should be published; Video Analytics, which gives programmers and distributors the ability to measure, analyze and optimize online video delivery; and Audience Management, a data management platform that consolidates audience information to make it actionable from an ad or targeting perspective.
Other Digital Enterprise Solutions
Adobe Connect
Adobe Connect is a web conferencing platform for web meetings, eLearning, and webinars. It powers mission critical web conferencing solutions end-to-end, on virtually any device, and enables organizations from leading corporations to large governmental agencies to fundamentally improve productivity.
LiveCycle
Adobe LiveCycle, Enterprise Suite is an enterprise document and form platform that helps enterprises captureforms platform. Since fiscal 2012, the focus of marketing and process information, deliver personalized communications, and protect and track sensitive information. Targeted at thelicensing these products has been to financial services and government markets, driven by a subset of our enterprise sales force. We have also been focused on migrating some legacy LiveCycle extends business processescustomers to an enterprise’s mobile workforce and clients, increasing productivity while broadening service access to any user equippedupdated offering with a desktop, smartphone, or tablet.
Other Products and Solutions
We offer a broad range of other digital media products and solutions. Information about other products not referenced here can be foundsimilar capabilities based on our corporate website, www.adobe.com, under the “Products” tab available in the “Menu”.Adobe Experience Manager solution.
COMPETITION
The markets for our products and services are characterized by intense competition, new industry standards, evolving business and distribution models, disruptive software and hardware technology developments, frequent new product introductions, short product life cycles, price cutting with resulting downward pressure on gross margins and price sensitivity on the part of consumers. Our future success will depend on our ability to enhance and better integrate our existing products, introduce new products on a timely and cost-effective basis, meet changing customer needs, provide best-in-class information security to build customer confidence and combat cyber-attacks, extend our core technology into new applications and anticipate and respond to emerging standards, business models, software delivery methods and other technological changes.
Digital Media
No single company has offerings identical tothat match the capabilities of our Creative Cloud products and services, but we face collective competition from a variety of point offerings, free products and downloadable apps. Our competitors includecompetition includes offerings from companies such as Apple, Autodesk, Avid, Facebook, Corel, Microsoft, Quark and others, as well as from many lower-end offerings available on touch-
enabled devices via app stores, and from various open source initiatives.offerings. We believe our greatest advantage in this marketspace is the performance and scope of our integrated solutions, which work together as part of Creative Cloud. With Creative Cloud, we also compete favorably on the basis of features and functionality, ease of use, product reliability, value and performance characteristics.
Professional digital imaging, drawing and illustration products are characterized by feature-rich competition, brand awareness and price sensitivity. Competition in this marketspace is also emerging with drawing and illustration applications on tablet and smartphone platforms. The demand for professional web page layout and professional web content creation tools is constantly evolving and highly volatile. In this area, we face direct and indirect competition from desktop software companies and various proprietary and open source web-authoring tools. Our Flash technologies face competition from alternative approaches to building rich content and web applications such as JavaFX, HTML5, native OS application programming environments and Unity.
The needs of digital imaging and video editing software users are constantly evolving due to rapid technology and hardware advancements in digital cameras, digital video cameras, printers, PCs, tablets, mobile phones and other new devices. Our imaging and video software offerings, including Photoshop, Lightroom, After Effects and Premiere, face competition from established and emerging companies offering similar products. We also continue to face competition from new and free products, including web services and mobile/tablet applications that compete directly with our Aviary offerings.
New image editing applications for mobile devices and tablets with features that compete with our professional products are also emerging as adoption of these devices grows. Our consumer digital imaging and video editing offerings are subject to intense competition, including customer price sensitivity, competitor brand awareness and competitor strength in OEM bundling and retail distribution. We face direct and indirect competition in the consumer digital imaging market from a number of companies that market software that competes with ours.
In addition, we face competition from device, hardware and camera manufacturers as they try to differentiate their offerings by bundling, for free, their own digital imaging software or those of our competitors. Similarly, we face potential competition from operating system manufacturers as they integrate or offer hobbyist-level digital imaging and image management features with their operating systems. We also face competition from smartphone and tablet manufacturers that integrate imaging and video software into their devices to work with cameras that come as part of their smartphone and tablet offerings. In addition, new social networking platforms such as Facebook (including Instagram), Snapchat, Twitter and Pinterest, as well as portal sites such as Google, Bing and Yahoo! are becoming a direct means to post, edit and share images, bypassing the step of using image editing and sharing software. Online storage and synchronization are becoming free and ubiquitous. Consumers in particular will be encouraged to use the image/image and video editing software associated withoffered by those sync/storestorage products, thus competing with our software.
Competition is also emerging withIn addition, the needs of digital imaging and video applications on smartphoneediting software users are constantly evolving due to rapid technology and tablet platforms. Competitors are extending their products and feature sets to platforms such as Apple’s iPhone and iPad,hardware advancements in digital cameras, digital video cameras, printers, personal computers, tablets, smartphones and other smartphone
new devices. Our imaging and tablet devices. Similarly, new cloud-basedvideo offerings, continue to emerge which offerincluding Photoshop, Lightroom, After Effects and Premiere Pro, face competition from established and emerging companies offering similar products.
New image editing and video-editing capabilities, as well as social and sharing features.
As customers such as publishers and media companies increase their desire to deliver their assets to new platforms such asapplications for mobile devices and tablets we expect new and existing companies to continue to offer solutionswith features that address these challenges that are competitivecompete with our Digital Publishing Suite. Many design agenciesprofessional tools are building capabilitiesalso emerging as adoption of these devices grows. Our consumer digital imaging and video editing offerings are subject to offer such solutions,intense competition, including customer price sensitivity and competitor brand awareness. We face direct and indirect competition in the consumer digital imaging space from a number of companies such as Amazon, Applewhose market software competes with our offerings.
The stock content marketplace has significant competition, especially in the microstock segment, where Adobe primarily operates today with our Adobe Stock offering. Key competitors in this segment include Shutterstock, Getty Images and Google offer an alternative formata number of smaller companies. Adobe Stock’s deep product integration with Creative Cloud and business model forsuperior reach and relationships with creative professionals around the delivery of newspaper and magazine content to mobile devices.world differentiate our offerings.
The nature of traditional digital document creation, storage, and collaboration has been rapidly evolving as knowledge workers and consumers shift their behavior increasingly to non-desktop workflows. Competitors like Microsoft, Google, Box and Dropbox all offer competitive alternatives to our AcrobatDocument Cloud business for creating and managing PDFs. In addition, other PDF creation solutions can be found at a low cost or for free on the web.web or via mobile applications. To address these competitive threats, we are working to ensure our Adobe AcrobatDocument Cloud applications stay at the forefront of innovation in emerging opportunities such as PDF document generation, document collaboration and document security.security, and have developed mobile solutions such as Adobe Scan.
As electronic signatures with EchoSigne-signatures are quickly becoming a core element of digital documents, competitors to Adobe Sign such as DocuSign have been jumpingemerged. Partnerships and integrations between these companies and third-parties create an increasingly competitive landscape in to take advantage of the growingthis space. DocuSign, Citrix, and others are incorporating competitive e-signature technology into their platforms.
Digital MarketingExperience
The markets in which our Digital MarketingExperience business unit competes are growing rapidly and characterized by intense competition. Our Adobe MarketingExperience Cloud solutions face competition from large companies such as Google, IBM, Marketo, Oracle, salesforce.com, SAP, SAS, Verizon, Teradata and others, in addition to point product solutions and focused competitors. Additionally, new competitors are constantly entering these markets. Some of these competitors provide SaaS solutions to customers, generally
through a web browser, while others provide software that is installed by customers directly on their servers. In addition, we compete at times with our customers’ or potential customers’ internally developed applications. Of the competitors listed above, no single company has products identical to our Adobe MarketingExperience Cloud offerings. Adobe MarketingExperience Cloud competes in a variety of areas, including: reporting and analytics; cross-channel marketing and optimization; online and social marketing; audience management; advertising and real-time bidding technology; video delivery and monetization; web experience management and others.
Many of the companies with which we compete offer a variety of products or services and as a result could also bundle their products or services, which may result in these companies effectively selling their products or services at or below market prices for individual products. In addition, largeLarge software, internet and database management companies have expanded their offerings in the digital marketingexperience area, either by developing competing services or by acquiring existing competitors or strategic partners of ours. We believe competitive factors in our markets include the proven performance, security, scalability, flexibility and reliability of services; the strategic relationships and integration with third-party applications; the intuitiveness and visual appeal of user interfaces; demonstrable cost-effective benefits to customers; pricing; the flexibility of services to match changing business demands; enterprise-level customer service and training; perceived market leadership; the usability of services; real-time data and reporting; independence from portals and search engines; the ability to deploy the services globally; and success in educating customers in how to utilize services effectively. We believe we compete favorably with both the enterprise and low-cost alternatives based on many of these competitive factors including our strong feature set, the breadth of our offerings, our focus on global, multi-brand companies, our superior user experience, tools for building multi-screen, cross-channel applications, standards-based architecture, scalability and performance and leadership in industry standards efforts.
Creative and digital agencies, as well as SIs, are increasingly investing in acquiring their own digital marketingexperience technology platforms to complement their creative services offerings. Adobe may face competition from these agencies and SIs as they come to market with best-of-breed offerings in one or more digital marketingexperience capabilities, or if agencies attempt to create a more complete technology platform offering. We believe our creative tools heritage differentiates us from our competitors. We have worked closely with marketing and creative customers for over thirty30 years. We also believe we have leadership in this market,space, with current customers representing leading global brands. Our comprehensive solutions extend more broadly than any other company in serving the needs of marketers and addressing this market opportunity; we integrate content and data, analytics, personalization, webdigital experience management, cross-channel campaign management, audience management, video delivery and monetization and social capabilities in our Adobe Marketing Cloud, surpassing the reach of any competitor.Experience Cloud. Most importantly, we provide a vision for our digital marketingexperience customers as we
engage with them across the important aspects of their business, extending from their use of Creative Cloud and Document Cloud to how they manage, deliver, measure and monetize their content with our Adobe MarketingExperience Cloud.
Print and
Publishing
Our Print and Publishing product offerings face competition from large-scale electronic and web publishing systems, XML-based publishing companies, as well as lower-end desktop publishing products. Depending on theSimilarly, our web conferencing product line,faces competition is based onfrom a number of established products from other companies, including Cisco, Citrix and Microsoft. Competition involves a number of factors, including: the quality andproduct features, of products, ease-of-use, printer service support, the level of customization and integration with other publishing system components, the number of hardware platforms supported, service and price. We believe we can successfully compete based upon the quality and features of our products, our strong brand among users, the widespread adoption of our products among printer service bureaus, and our extensive application programming interface.interfaces.
In printing technologies, we believe the principal competitive factors for OEMs in selecting a page description language or a printing technology are product capabilities, market leadership, reliability, price, support and engineering development assistance. We believe that our competitive advantages include our technology competency, OEM customer relationships and our intellectual property portfolio.
PRINCIPAL PRODUCTS AND SERVICES
Digital Media Offerings
Creative Cloud
Adobe Creative Cloud is a cloud-based subscription offering that enables creative professionals and enthusiasts alike to express themselves with apps and services that connect across devices, platforms and geographies. Members have access to a vibrant creative community, publishing services to deliver apps and websites, cloud storage to easily access their work, the ability to sync their files to virtually any device, collaboration capabilities with team members, and new products and exclusive updates as they are developed. Creative Cloud members can build a Creative Profile which persists wherever they are. A user’s Creative Profile moves with them via Creative Cloud services from app to app and device to device, giving them immediate access to their personal files, photos, brushes, graphics, colors, fonts, text styles, desktop setting customizations and other important assets. Creative Cloud subscriptions include all of the applications listed below and many more.
Photoshop and Lightroom
Adobe Photoshop is the world’s most advanced digital imaging solution. It is used by photographers, designers, animators, web professionals, and video professionals, and is available to Creative Cloud subscribers. Lightroom CC, our new cloud-based photo service for editing, organizing, storing and sharing photos, is also available to Creative Cloud subscribers. Customers can also subscribe to Photoshop or Lightroom CC as individual cloud-enabled subscription products, or through our Photography Plan, which is a cloud-enabled offering targeted at photographers and photo hobbyists and includes Lightroom CC, integrated cloud services, and Lightroom Classic.
We also offer Photoshop Elements, which is targeted at consumers who desire the brand and power of Photoshop through an easy-to-use interface. For tablet and smartphone users, we offer several mobile apps including Photoshop Sketch, Photoshop Mix, Photoshop Express, Lightroom for mobile and Photoshop Fix—all of which enable sophisticated photo editing and content creation using a touch-based interface on tablet and mobile devices.
Illustrator
Adobe Illustrator is our industry-standard vector graphics solution used worldwide by designers of all types who want to create digital graphics and illustrations for all kinds of media: print, web, interactive, video, and mobile. Illustrator is available to Creative Cloud subscribers, and customers can also subscribe to use it as an individual subscription product. Users can also utilize mobile apps such as Illustrator Draw to gain access to Illustrator capabilities on their tablets and mobile devices, and sync their work through CreativeSync for use with Illustrator on their desktop.
Adobe XD
Adobe XD is our all-in-one UX/UI solution for designing websites, mobile apps and more that is designed to enable users to go from concept to prototype faster. It contains intuitive tools that deliver precision and performance using timesaving features like Repeat Grid and flexible artboards to create everything from low-fidelity wireframes to fully interactive prototypes for any screen in minutes. Adobe XD also makes it easy to share prototypes with teammates via the web and show colleagues how
multiscreen experiences look, feel and work with a single click. Adobe XD is available to Creative Cloud subscribers, and customers can also subscribe to use it as an individual cloud-enabled subscription product.
InDesign
Adobe InDesign is the leading professional page layout software for print and digital publishing. Our customers use it to design, preflight, and publish a broad range of content including newspapers and magazines for print, online, and tablet app delivery. Customers can create simple or complex layouts quickly and efficiently with precise control over typography, built-in creative tools, and an intuitive design environment. Tight integration with other Adobe offerings such as Photoshop, Illustrator, and Acrobat enables customers to work productively in print and digital workflows. Customers can also access Adobe digital publishing capabilities from within InDesign to create and publish engaging apps for a broad range of devices, including iOS, Android and Amazon-based devices. InDesign is available to Creative Cloud subscribers, and customers can also subscribe to use InDesign as an individual cloud-enabled subscription product.
Adobe Premiere Pro
Adobe Premiere Pro is a leading nonlinear video editing tool used by video professionals. Customers can import and combine various types of media, from video shot on a smartphone to 8K to virtual reality, and then edit in its native format without transcoding. Premiere Pro supports a vast majority of formats, and customers can use multiple graphics cards to accelerate render and export times. As part of Creative Cloud, Premiere Pro tightly integrates with other Adobe creative applications. Customers can also subscribe to use it as an individual cloud-enabled subscription product.
Adobe Dimension
Adobe Dimension (formerly Project Felix) is our newly released product that is designed to make it easy for graphic designers to create high-quality, photorealistic 3D images. Users can composite 2D and 3D assets to build product shots, scene visualizations, and abstract art. Dimension integrates well with other Adobe apps. Users can drag and drop background images from Photoshop and 3D models from Adobe Stock - without leaving Dimension. Dimension is available to Creative Cloud subscribers, and customers can also subscribe to use it as an individual cloud-enabled subscription product.
After Effects
Adobe After Effects is our industry-leading animation and creative compositing solution used by a wide variety of motion graphics and visual effects artists. It offers superior control, a wealth of creative options, and integration with other post-production applications. After Effects works together seamlessly with other Adobe apps such as Premiere Pro, Photoshop, Illustrator, and Audition. After Effects is available to Creative Cloud subscribers, and customers can also subscribe to use it as an individual cloud-enabled subscription product.
Typekit
Adobe Typekit brings thousands of fonts from foundry partners into one library for quick browsing, easy use on the web or on the user’s desktop, and endless typographic inspiration. Our full library of commercially-licensed fonts is offered through Creative Cloud. In addition, customers may subscribe to the standalone Typekit portfolio plan, or license individual fonts in the Adobe Typekit Marketplace.
Behance
Behance is the leading social community to showcase and discover creative work online. Adobe Portfolio allows users to quickly and simply build a fully customizable and hosted website that seamlessly syncs with Behance.
Adobe Spark
Adobe Spark is our integrated web and mobile software for creating and sharing impactful visual stories. Designed for everyday communication, AdobeSpark empowers users to create stunning visual content that engages audiences across multiple channels and on any device. The Adobe Spark web app seamlessly syncs with Spark Post, Spark Page and Spark Video iOS mobile apps, allowing users to create, edit and share their story from any location regardless of their design experience. Adobe Spark with premium features allows users to apply custom branding to anything they create; the premium product is offered as part of any Creative Cloud plan or as a standalone subscription. A free version is also still available to attract new users.
Acrobat and Adobe Document Cloud
Adobe Document Cloud is a complete portfolio of secure digital document solutions that speed business transactions through streamlined digital workflows. With Adobe Document Cloud, users can create, review, approve, sign and track documents, whether on a desktop or mobile device.
At the heart of Adobe Document Cloud is Adobe Acrobat DC, the industry standard for PDF creation and conversion. Acrobat enables users to create secure, reliable and compact Adobe PDF documents from desktop authoring applications such as Microsoft Office software, graphics applications and more. Acrobat enables automated collaborative workflows with a rich set of commenting tools and review tracking features and includes everything needed to create and distribute rich, secure electronic documents that can be viewed easily within leading web browsers or on computer desktops via the free Adobe Acrobat Reader DC.
Acrobat is available to both Creative Cloud and Document Cloud subscribers. Customers can also license Acrobat Pro or Acrobat Standard (which has a subset of Acrobat Pro features) as individual point products, either as a cloud-enabled subscription or in the form of desktop software. Acrobat is also available as a free mobile app that allows users to view, annotate, and scan documents. Acrobat Reader is our free software for reliable viewing, searching, reviewing and printing of Adobe PDF documents on a variety of hardware and operating system platforms. Users of both Acrobat and Acrobat Reader can also access, edit and save changes to their PDF files stored on the Dropbox website or mobile app.
Adobe Scan can be used on mobile devices to provide scanning capabilities in the pocket of every person. It captures paper documents as images and transforms them into full-featured and versatile PDFs via Document Cloud services for instant sharing with others.
Our Adobe Sign e-signature services, which can be accessed as part of Document Cloud, allow users to securely electronically send and sign any document from any device. Adobe Sign has a mobile app companion allowing users to e-sign documents and forms, send them for signature, track responses in real-time, and obtain instant signatures with in-person signing. It integrates with users’ enterprise systems through a comprehensive set of applicable programming interfaces, and Adobe Experience Manager Forms and Advanced Workflows for Adobe Sign to create forms and provide seamless experiences to customers across web and mobile sites. Adobe Sign is Microsoft’s preferred e-sign solution and is integrated into Microsoft Office 365, Microsoft Dynamics 365, and Microsoft SharePoint.
Adobe Experience Cloud Products and Services
Adobe Experience Cloud includes our Marketing Cloud, Analytics Cloud, and Advertising Cloud offerings, which are each described below.
Adobe Marketing Cloud
Adobe Marketing Cloud provides a complete set of integrated digital marketing solutions. It contains everything necessary to deliver first-class digital experiences. Adobe Marketing Cloud enables our customers to manage their content and assets, grow audiences and increase engagement to optimize customer experiences; personalize content and deliver optimized experiences at scale that are meaningful to each of their customers; and orchestrate individual cross-channel campaigns that encourage meaningful customer experiences. Adobe Marketing Cloud also provides a solution that allows our customers to monetize video experiences. The following is a brief description of the solutions that comprise the Adobe Marketing Cloud.
Adobe Experience Manager
Adobe Experience Manager is a leading digital experience management solution that helps customers organize, create, and manage the delivery of creative assets and other content across digital marketing channels, including web, mobile, email, communities and video. It enables customers to manage content on premise or host it in the cloud, delivering agile and rapid deployment. With this ultimate control of content and campaigns, our customers can deliver real-time and personalized experiences to their consumers that help build the customers’ brand, drive demand and extend reach. Adobe Experience Manager includes digital asset management, web content management, digital publishing, integrated mobile app development, enterprise-level forms management, and social capabilities, providing customers with tools enabling users to improve their market and brand perception and provide a personalized experience to their consumers.
Adobe Campaign
Adobe Campaign enables marketers to orchestrate personalized experiences determined by each consumer’s behaviors and preferences. As part of its feature set, Adobe Campaign provides visual campaign orchestration, allowing for intuitive design and automated consumer experiences across channels, from one-off campaigns to triggered messages, with a graphically rich interface. Marketers can also integrate consumer data from across marketing channels to develop and deliver more relevant marketing experiences to their consumers. Features also include targeted segmentation, multilingual email execution, real-time interaction, in-app messaging, and operational reporting to easily see how well campaigns are performing.
Adobe Target
Adobe Target lets our customers test, target and personalize content across multiple devices. With Adobe Target, our customers have the tools they need to quickly discover what gets noticed, what increases conversion, and what keeps consumers coming back for more. It paves a path from simple testing to targeting to true segmentation and optimization through A/B and multivariate testing, content targeting and automated decision-making. Adobe Target capabilities also enable our customers to test and target adaptive or responsive mobile web experiences.
Adobe Primetime
Adobe Primetime is a multiscreen TV platform that helps broadcasters, cable networks, and service providers create and monetize engaging, personalized viewing experiences. When integrated with Adobe Experience Cloud solutions, media sellers can optimize campaign and advertisement delivery in real time.
Adobe Analytics Cloud
Adobe Analytics Cloud provides a core intelligence engine for enterprises that allow customers to put real-time insights into action. With Adobe Analytics Cloud, enterprise-level marketing analytics is made understandable and accessible to everyone in the organization; targeting is improved, as our customers can connect their analytics with real-time activation so the transition from insight to action is fast; users are provided with an objective view of their customers’ journeys across every device and channel that helps them achieve better understanding of their ROI; and segmentation is more precise as our customers can discover and create high-value audiences and understand the best way to reach them. The following is a brief description of the solutions that comprise the Adobe Analytics Cloud.
Adobe Analytics
Adobe Analytics is our industry leading solution that helps our customers create a holistic view of their business by turning consumer interactions into actionable insights. With intuitive and interactive dashboards and reports, our customers can sift, sort, and share real-time information to provide insights that can be used to identify problems and opportunities and to drive conversion and relevant consumer experiences. Adobe Analytics enables web, social, video, mobile, attribution, and predictive analytics across online and offline channels to continuously improve the performance of marketing activities. It also provides the ability to perform advanced ad-hoc segmentation and to integrate data from offline and third-party sources. Adobe Analytics is available in four plans that contain various features and add-ons to meet the needs of our customers’ businesses.
Adobe Audience Manager
Adobe Audience Manager is a data management platform that helps digital publishers build unique audience profiles to identify the most valuable segments and use them across any digital channel. Adobe Audience Manager consolidates audience information from all available sources. It then identifies, quantifies, and optimizes high-value target audiences, which can then be offered to advertisers via an integrated, secure, privacy-friendly management system that works across all advertising distribution platforms. Adobe Audience Manager provides access to multiple data sources, offering digital publishers the ability to use a wide variety of third-party data as well as Audience Manager’s private data co-op.
Adobe Advertising Cloud
Adobe Advertising Cloud is an end-to-end platform for managing advertising across traditional TV and digital formats. With Adobe Advertising Cloud, customers can identify and amplify their high-value audiences for more personal and accurate targeting; seamlessly unite creative, data, and media buying across all screens and formats; protect their brand by preventing their campaigns from mixing with content and properties that do not align with their image; and use data insights that reveal customers’ interests and past behaviors to create relevant, targeted ads. Adobe Advertising is comprised of the Adobe Media Optimizer offerings described below.
Adobe Media Optimizer Search
Adobe Media Optimizer Search allows customers to simulate and quickly act upon the best and most profitable options in their search marketing strategy. Specifically, it provides customers with sophisticated models to test and visualize the expected traffic and conversion for keywords, ad placements, and product targets. Adobe Media Optimizer Search also enables customers to run models to determine the highest performing mix of advertising at varied spend levels across portfolios and then validate assumptions with reports based on models and data.
Adobe Media Optimizer Demand Side Platform (DSP)
Adobe Media Optimizer DSP (formerly TubeMogul) is a unified cross-channel solution that allows customers to streamline global advertising from a single platform. With Adobe Media Optimizer DSP, customers can intelligently target their most valuable
audiences by optimizing display ad campaigns in real time. Adobe Media Optimizer DSP’s programmatic TV buying solution extends many of the benefits digital buying offers - like targeting and reporting insights - to television advertising. It helps advertisers plan campaigns holistically, across every screen, while providing more flexibility to shift spend and optimize reach and frequency. Adobe Media Optimizer DSP also provides users with the tools to create, manage, optimize and scale ads for Facebook and Instagram.
Adobe Media Optimizer Dynamic Creative Optimization (DCO)
Adobe Media Optimizer DCO enables advertisers to reach specific audiences with flexible creative content that’s personalized in real time based on site actions, customer and partner data, and third-party demographic data. Adobe Media Optimizer DCO provides customers with robust campaign options, from retargeting and loyalty programs to prospecting and awareness campaigns; site visitor, partner, third-party and location data to improve audience targeting; flexibility to deliver the right content across device types; and reports and algorithms to help optimize creative elements.
Other Products and Services
We also offer a broad range of other enterprise and digital media products and services. Information about other products not referenced here can be found on our corporate website, www.adobe.com.
OPERATIONS
Marketing and Sales
We market and license our products directly using our sales force and certain local offices and through our own website at www.adobe.com. We also market and distribute our products through sales channels, which include distributors, retailers, software developers, systems integrators,SIs, ISVs and VARs, as well as through OEM and hardware bundle customers.
We support our end users throughOur local field offices and our worldwide distribution network, which includesinclude locations in Australia, Austria, Belgium, Brazil, Canada, Chile, China, Columbia, Czech Republic, Denmark, Finland, France, Germany, Hong Kong, India, Ireland, Israel, Italy, Japan, Korea, Mexico, Moldova, the Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Turkey,United Arab Emirates, the United Kingdom and the United States.
We sell the majority of our products through a software subscription model where our customers purchase access to a product for a specific period of time and during which they always have rights to use the most recent version of that product. We
also license perpetual versions of our software with maintenance and support, which includes rights to upgrades, when and if available, support, updates and enhancements.
For fiscal 20142017, 2016 and 2013,2015, there were no customers that represented at least 10% of net revenue. ForAs of fiscal 2012, Ingram Micro accounted for 11% of net revenue. Ingram Micro is a distributor who sells products across our various segments. We have multiple non-exclusive, independently negotiated distribution agreements with Ingram Micro and its subsidiaries covering our arrangements in specified countries and regions. Each of these contracts has an independent duration, is independent of any other agreement (such as a master distribution agreement) and any termination of one agreement does not affect the status of any of the other agreements.
In fiscalyear end 20142017 and 20132016, no single customer was responsible for over 10% of our trade receivables.
Order Fulfillment Distribution
The procurement of the various components of packaged products, including DVDs and printed materials, and the assembly of packages for retail and other applications products is controlled by our product delivery operations organization. We outsource our procurement, production, inventory and fulfillment activities to third parties in the United States, EMEA and APAC.
To date, we have not experienced significant difficulties in obtaining raw materials for the manufacture of our products or in the replication of DVDs, printing and assembly of components.
Our evolution to a services and subscription-based business model has decreased the need to produce and distribute physical products. We still produce packaged products for a subset of our business, but that percentage is declining as the digital delivery of our services and subscriptions continues to grow.
Services and Support
We provide professional services,expert consulting, customer success management, technical support, and customer servicelearning services across all our customer segments, including enterprises, small/small and medium businesses, creative professionals, and consumers. With a focus on ensuring sustained customer success and realized value, this comprehensive portfolio of services is designed to help customers and partners maximize the return on their investments in our cloud solutions and licensed products. Our service and support revenue consists primarily of consulting fees, software maintenance, andtechnical support fees and training fees.
Consulting Services
We have a global professional services team dedicated to designing developing and implementing solutions for enterprise customers in key vertical markets and to transfer technical expertise to our solution partners. Thelargest customers. Our professional services team uses a comprehensive, customer-focused methodology to develop high-quality solutions, which in turn deliver a competitive advantage to our enterprise customers. This methodologythat has been developed byrefined over years of capturing and analyzing best practices from numerous clientcustomer engagements across a diverse mix of solutions, industries, and customer preferences. Based on thissegments. Increasingly, our customers seek to integrate across Adobe’s products and cloud solutions, and engage our professional services teams to share their expertise in leading customers’ digital strategies and multi-solution integrations. Using our methodology, our professional services teams are able to accelerate thecustomers’ time to value, and maximize the return our clientscustomers earn on their investment in Adobe solutions.
In addition, Adobe has also created
A key component of Adobe’s strategy is developing a large and vibrant partner ecosystem to expand the reach and breadth of Adobe solutions in the global marketplace. In order to assist partners in building their respective digital practices, Adobe Global Services provides a comprehensive set of deliverables through Adobe’s Solution Partner Program. The breadth of services described in the
program provides system integrators, agencies, and regional partners the tools required to develop core capabilities for positioning and building with Adobe technology, as well as implementing and running customer platforms. We believe that includes a mixthrough these programmatic services and support, our joint customers benefit greatly by the combination of Adobe technology and the deep customer context that our global System Integrators (“SIs”), regional SIs, VARs,partners represent.
Customer Success Account Management
For our largest Digital Agencies,Experience and Digital Media customers, Adobe Global Services provides post-sales Customer Success Managers, who work individually with customers on an ongoing basis to understand their current and future business needs, promote faster solution partners. Adobe investsadoption, and align product capabilities to enable this ecosystemcustomers’ business objectives to maximize the return on their investment in Adobe’s offerings. We engage customers to share innovative best practices, relevant industry and vertical knowledge, and proven success strategies based on our extensive engagements with the right skillsleading marketers and knowledge about our technologies and best practices. Consequently, this ecosystem provides our clients several different choicesbrands. The performance of partners, and a large accessible pool of skilled resources that can help deploy and manage Adobe solutions. This approach not only creates value for our customers and partners, but also creates a large and productive go-to-market channel for our sales teams.these teams is directly associated with customer-focused outcomes, notably ongoing customer retention.
Technical Support
A portion of our support revenue is composed of our
Adobe provides enterprise maintenance and support offerings.services to customers of subscription products as part of the subscription entitlement, and to perpetual license customers via annual fee-based maintenance and support programs. These offerings entitle customers to:provide:
the right to receive
technical support on the technologyproducts they have purchased from Adobe;
the right to receive basic “how“how to” help in using our products; and
the right to receive product upgrades and enhancements during the term of the maintenance and support or subscription period, which is typically one year.to three years.
We offer a range of support programs, from fee-based incidents to annual support contracts. Additionally, we provide extensive self-help and online technical support capabilities via the web and through social media channels allowing customers
quick and easy access to possible solutions. As a registered owner of the current version of an Adobe desktop product, customers are eligible to receive Getting Started support on certain matters. Support for some products and in some countries may vary.
We provide product support through a combination of outsourced vendors and internal support centers, and through multiple channels including phone, chat, web, social media, and email. These support services are delivered by a global support organization that includes several regional and global support centers.centers, supplemented with outsourced vendors for specific services. Customers can seek help through multiple channels including phone, chat, web, social media, and email, allowing quick and easy access to the information they need. These teams are responsible for providing timely, high-quality technical expertise on all our products.
As registered owners of the current version of an Adobe desktop product, consumers are eligible to receive Getting Started support on certain matters, to support easy adoption of their products. Support for some products as well as providingand in some countries may vary. For enterprise customers with greater support needs, we offer personalized service options through Premium Services options, delivered by technical account managers who can also provide proactive risk mitigation services.services and on-site support services for those with business critical deployments.
We
Lastly, we also offer delivery assurance, technical support, and enablement services to partners and developer organizations. TheThrough the Adobe Partner Connection Program, focuses on providingwe provide developers with high-quality tools, software development kits, information and services.
Training
We offerDigital Learning Services
Adobe Global Services offers a comprehensive portfolio of training optionslearning and enablement services to enableassist our customer and partner teams in the use of our products.products, including those within Digital Marketing, Digital Media and other legacy products and solutions. Our training portfolio includes a large number of free on-line informational servicesonline self-service learning options on www.adobe.com and a growing serieswww.training.adobe.com. Adobe Digital Learning Services also has an extensive portfolio of how-to books published by Adobe Press pursuant to a joint publishing agreement with Peachpit Press. We sponsor workshops, work with professional associations and user groups, and conduct regular beta testing programs. We also provide fee-based education services to enhance our customers’ use of our solutions,learning programs including a wide range of traditional classroom, virtual, and onlineon-demand training and certifications delivered by our team of training professionals. Adobe’s portfolio ofprofessionals and partners across the globe.
These core offerings are complemented by our custom learning services, which support our largest enterprise customers and their unique requirements. Solution-specific skills assessments help our enterprise customers objectively assess the knowledge and competencies within their marketing teams and tailor their learning priorities accordingly. Finally, aligned with our cloud strategy, we have introduced a new learning subscription service that enables customers to access both business and technical training courses covers our Digital Media, Digital Marketing and other mature products and solutions.training over a 12-month period, which is a scalable approach to supporting long-term learning.
Investments
WeFrom time to time we make direct investments in privately held companies. We enter into these investments with the intent of securing financial returns as well as for strategic purposes, as they often increase our knowledge of emerging markets and technologies as well asand expand our opportunities to provide Adobe products and services.
PRODUCT DEVELOPMENT
As the software industry is characterized by rapid technological change, aA continuous high level of investment is required for the enhancement of existing products and servicessolutions and the development of new products and services.solutions due to the speed of technological change that characterizes the software industry. We develop our software internally, as well as acquire products or technology developed by others by purchasing the stock or assets of the business entity that ownedowns the technology. In other instances, we have licensed or purchased the intellectual property ownership rights of programs developed by others with license or technology transfer agreements that may obligate us to pay a flat license fee or royalties, typically based on a dollar amount per unit shipped or a percentage of the revenue generated by those programs.
During fiscal 20142017, 20132016 and 20122015, our research and development expenses were $844.4 million,$1.22 billion, $826.6976.0 million and $742.8862.7 million, respectively.
PRODUCT PROTECTIONPROTECTING AND LICENSING OUR PRODUCTS
We regardprotect our software as proprietary and protect it under the lawsintellectual property through a combination of patents, copyrights, patents, trademarks and trade secrets.secrets, foreign intellectual property laws, confidentiality procedures and contractual provisions. We have a number of domesticUnited States and foreign patents and pending applications that relate to various aspects of our products and technology. While we believeAlthough our patents have value, no single patent is material to us oressential to any of our reporting segments.principal businesses. We have also registered, and applied for the registration of, U.S. and international trademarks, service marks, domain names and copyrights.
Our enterprise customers license our hosted offerings as On-demand Services or Managed Services, and consumers primarily use our desktop software and mobile apps. We license our desktop software to users under ‘click through’ or signed license agreements containing restrictions on duplication, disclosure, and transfer. Similarly, cloud products and services are provided to users under ‘click through’ or signed agreements containing restrictions on access and use.
Despite our efforts to protect the source code of our software programs as trade secretsproprietary technology and make source code available to third parties only under limited circumstances and subject to specific security and confidentiality constraints. From time to time, we secure rights to third-partyour intellectual property if beneficialrights, unauthorized parties may attempt to copy or obtain and use our business.
Our products are generally licensedtechnology to end users under one ofdevelop applications with the following two methods:
| |
(1) | We offer products on a “right to use” basis pursuant to a license that restricts the use of the products to a designated number of devices, users or both. We also rely on copyright laws and on “shrink wrap” and electronic licenses that are not physically signed by the end user. Copyright protection may be unavailable under the laws of certain countries and the enforceability of “shrink wrap” and electronic licenses has not been conclusively determined in all jurisdictions. |
| |
(2) | We offer products under a SaaS or on-demand model, where hosted software is provided on demand to customers, generally through a web browser. The use of these products is governed by either the online terms of use or an enterprise licensing agreement associated with the product. |
same functionality as our application. Policing unauthorized use of computerour technology and intellectual property rights is difficult. We believe that our transition from perpetual-use software is difficult and software piracy islicenses to a persistent problem forsubscription-based business model combined with the software industry. This problem is particularly acute in international markets. We conduct piracy conversion and prevention programsincreased focus on cloud-based computing may improve our efforts to combat the pirating of our products.
directly and through certain external software associations. In addition, we have activation technology in certain products to guard against illegal use and will continue to do so in certain future products.
EMPLOYEES
As of November 28, 2014December 1, 2017, we employed 12,49917,973 people. We have not experienced work stoppages and believe our employee relations are good.
AVAILABLE INFORMATION
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our Investor Relations website at www.adobe.com/adbe as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information posted on our website is not incorporated into this report.
EXECUTIVE OFFICERS
Adobe’s executive officers as of January 16, 201512, 2018 are as follows:
|
| | | | |
| Name | | Age | | Positions |
Shantanu Narayen | | 5154 | | President, and Chief Executive Officer, and Chairman of the Board Mr. Narayen currently serves as Adobe’sour President, and Chief Executive Officer. Mr. NarayenOfficer, and Chairman of the Board. He joined Adobe in January 1998 as Vice President and General Manager of Adobe’sour engineering technology group. In January 1999, he was promoted to Senior Vice President, Worldwide Products, and in March 2001 he was promoted to Executive Vice President, Worldwide Product Marketing and Development. In January 2005, Mr. Narayen was promoted to President and Chief Operating Officer, and ineffective December 2007, he was appointed our Chief Executive Officer of Adobe and joined the Adobeour Board of Directors. Prior to joining Adobe,In January 2017, Mr. Narayen co-founded Pictrawas selected by our Board of Directors as Chairman of the Board. Mr. Narayen serves on the board of directors of Pfizer Inc., a digital photo sharing software company, in 1996.multinational pharmaceutical corporation. He was Director of Desktop and Collaboration products at Silicon Graphics Inc. before founding Pictra. Mr. Narayen is alsopreviously served as a director of PfizerDell Inc. from September 2009 to October 2013. Mr. Narayen holds a B.S. in Electronics Engineering from Osmania University in India, a M.S. in Computer Science from Bowling Green State University and an M.B.A. from the Haas School of Business, University of California, Berkeley. |
|
| | | | |
| Name | | Age | | Positions |
| Mark Garrett | | 5760 | | Executive Vice President, Chief Financial Officer Mr. Garrett joined Adobe in February 2007 as Executive Vice President and Chief Financial Officer. Mr. Garrett served as Senior Vice President and Chief Financial Officer of the Software Group of EMC Corporation, a products, services and solutions provider for information management and storage, from June 2004 to January 2007, his most recent position since EMC’sEMC's acquisition of Documentum, Inc., an enterprise content management company, in December 2003. Mr. Garrett first joined Documentum as Executive Vice President and Chief Financial Officer in 1997, holding that position through October 1999 and then re-joining Documentum as Executive Vice President and Chief Financial Officer in 2002. Mr. Garrett is also a director of Informatica CorporationPure Storage, Inc., the Adobe Foundation, and Model N, Inc.the Children's Discovery Museum of San Jose. |
| Matthew Thompson | | 5659 | | Executive Vice President, Worldwide Field Operations Mr. Thompson currently serves as Executive Vice President, Worldwide Field Operations. Mr. Thompson joined Adobe in January 2007 as Senior Vice President, Worldwide Field Operations. In January 2013, he was promoted to Executive Vice President, Worldwide Field Operations. Prior to joining Adobe, Mr. Thompson served as Senior Vice President of Worldwide Sales at Borland Software Corporation, a software delivery optimization solutions provider, from October 2003 to December 2006. Prior to joining Borland, Mr. Thompson was Vice President of Worldwide Sales and Field Operations for Marimba, Inc., a provider of products and services for software change and configuration management, from February 2001 to January 2003. From July 2000 to January 2001, Mr. Thompson was Vice President of Worldwide Sales for Calico Commerce, Inc., a provider of eBusiness applications. Prior to joining Calico, Mr. Thompson spent six years at Cadence Design Systems, Inc., a provider of electronic design technologies. While at Cadence, from January 1998 to June 2000, Mr. Thompson served as Senior Vice President, Worldwide Sales and Field Operations and from April 1994 to January 1998 as Vice President, Worldwide Professional Services. Mr. Thompson is a board member of NCR Corporation. |
|
| | | | |
Name | | Age | | Positions |
Michael Dillon
| | 5659 | �� | SeniorExecutive Vice President, General Counsel and Corporate Secretary
Mr. Dillon joined Adobe in August 2012 as Senior Vice President, General Counsel and Corporate Secretary. Prior to joining Adobe, Mr. Dillon served as General Counsel and Corporate Secretary of Silver Spring Networks, a networking solutions provider, from November 2010 to August 2012. Before joining Silver Spring Networks, Mr. Dillon served in various capacities at Sun Microsystems, a diversified computer networking company, prior to its acquisition by Oracle Corporation. While at Sun Microsystems, from April 2006 to January 2010, Mr. Dillon served as Executive Vice President, General Counsel and Secretary, from April 2004 to April 2006, as Senior Vice President, General Counsel and Corporate Secretary, and from July 2002 to March 2004 as Vice President, Products Law Group. From October 1999 until June 2002, Mr. Dillon served as Vice President, General Counsel and Corporate Secretary of ONI Systems Corp, an optical networking company. |
Naresh Gupta
| | 48 | | Senior Vice President, Print and Publishing Business Unit and Managing Director, Adobe India
Dr. Gupta currently serves as Senior Vice President of Print and Publishing and Managing Director of Adobe India. Dr. Gupta joined Adobe in 1996 as Mr. Dillon is a board member of the Corporate Research group. He was promoted to Managing Director ofAdventure Cycling Association, Business Software Alliance, and the Adobe Noida in 1998. In 2003 he was promoted to Vice President of Engineering and Managing Director. In April 2005, Dr. Gupta was promoted to Senior Vice President of Emerging Business and, subsequently, in 2005, he was promoted to Senior Vice President of Print and Publishing and Managing Director of Adobe India. Prior to joining Adobe, he served as a Principal Scientist and Director of the Applied Artificial Intelligence (AI) group at LNK Corp.
Foundation.
|
| Bryan Lamkin | | 5457 | | SeniorExecutive Vice President Technology and Corporate DevelopmentGeneral Manager, Digital Media
Mr. Lamkin currently serves as Executive Vice President and General Manager, Digital Media. He rejoined Adobe in February 2013 as Senior Vice President, Technology and Corporate Development. From June 2011 to May 2012, Mr. Lamkin served as President and Chief Executive Officer of Clover, a mobile payments platform. Prior to Clover, Mr. Lamkin co-founded and served as the Chief Executive Officer of Bagcheck, a sharing and discovery platform, from June 2010 to May 2011. From April 2009 to June 2010, Mr. Lamkin served as Senior Vice President of Consumer Products and Applications at Yahoo!, a global technology company providing online search, content and communication tools. From May 2008 to April 2009, Mr. Lamkin served as Executive in Residence at Sutter Hill Ventures. Mr. Lamkin previously was with Adobe from 1992 to 2006 and held various senior management positions including Senior Vice President, Creative Solutions Business Unit.
|
Ann Lewnes
| | 5356 | | SeniorExecutive Vice President and Chief Marketing Officer
Ms. Lewnes joined Adobe in November 2006 and currently serves as SeniorExecutive Vice President and Chief Marketing Officer. Prior to joining Adobe, Ms. Lewnes spent 20 years at Intel Corporation, where she was Vice President of Sales and Marketing. Ms. Lewnes has been elected to theis a board of directorsmember of Mattel, Inc., effective February 1, 2015.The Ad Council, and the Adobe Foundation. |
|
| | | | |
| Name | | Age | | Positions |
Donna Morris
| | 4750 | | SeniorExecutive Vice President, PeopleCustomer and PlacesEmployee Experience
Ms. Morris currently serves as SeniorExecutive Vice President of Adobe’sAdobe's Global PeopleCustomer and PlacesEmployee Experience organization. Ms. Morris joined Adobe as Senior Director of Global Talent Management in April 2002 through the acquisition of Accelio Corporation, a Canadian software company, where she served as Vice President of Human Resources and Learning. In December 2005, Ms. Morris was promoted to Vice President, Global Human Resources Operations and subsequently to Senior Vice President, Human Resources in March 2007. Ms. Morris is a director of the Society for Human Resource Management and the Adobe Foundation. |
| Abhay Parasnis | | 43 | | Executive Vice President and Chief Technology Officer
Mr. Parasnis joined Adobe in July 2015 as Senior Vice President of Adobe's Cloud Technology & Services organization and Chief Technology Officer. Prior to joining Adobe, he served as President and Chief Operating Officer at Kony, Inc. from March 2013 to March 2015. From January 2012 to November 2013, Mr. Parasnis was a Senior Vice President and later Strategic Advisor for the Oracle Public Cloud at Oracle. Prior to joining Oracle, he was General Manager of Microsoft Azure AppFabric at Microsoft from April 2009 to December 2011. |
Bradley Rencher
| | 4144 | | SeniorExecutive Vice President and General Manager, Digital MarketingExperience
Mr. Rencher serves as SeniorExecutive Vice President and General Manager of Adobe’sAdobe's Digital MarketingExperience business unit. Mr. Rencher joined Omniture, Inc. in January 2008 as Vice President of Corporate Development and was promoted to Senior Vice President of Business Operations prior to Adobe’sAdobe's acquisition of Omniture in 2009. Following the acquisition he joined Adobe as Vice President of Business Operations. Mr. Rencher was promoted to Vice President and General Manager, Omniture business unit in 2010 and subsequently to Senior Vice President in 2011. Prior to joining Omniture, Mr. Rencher was a member of the technology investment banking team at Morgan Stanley from 2005 to 2008 and a member of the investment banking team at RBC Capital Markets from 1998 to 2004. Mr. Rencher is a director of Pluralsight and the Utah Symphony. |
|
| | | | |
NameScott Belsky | | Age37 | | PositionsChief Product Officer and Executive Vice President, Creative Cloud
Mr. Belsky joined Adobe in December 2017 as Executive Vice President and Chief Product Officer, Creative Cloud. Prior to joining Adobe in December 2017, Belsky was a venture investor at Benchmark in San Francisco from February 2016 to December 2017. Prior to Benchmark, Belsky led Adobe's mobile strategy for Creative Cloud from December 2012 to January 2016, having joined the company through the acquisition of Behance. Belsky co-founded Behance in 2006 and served as its CEO for over 6 years. He is an early advisor and investor to Pinterest, Uber, and Warby Parker among other early-stage companies, and co-founded and serves on the Board of Prefer, a referrals platform that empowers the careers of independent professionals. Mr. Belsky serves on the advisory board of Cornell University's Entrepreneurship Program and is President of the Smithsonian Cooper-Hewitt National Design Museum board of trustees. |
David Wadhwani John Murphy | | 4349 | | Senior Vice President, Chief Accounting Officer and General Manager, Digital MediaCorporate Controller
Mr. Wadhwani servesMurphy joined Adobe in March 2017 as our Senior Vice President, and General Manager of Adobe’s Digital Media business unit. Prior to June 2010, Mr. Wadhwani was Vice President and General Manager of Adobe’s Platform business unit. He joined Adobe in 2005 through the acquisition of Macromedia. Prior to his time at Macromedia, Mr. Wadhwani founded and was VP of Engineering at iHarvest, a content management company that was acquired by Interwoven and worked at Oracle in their database tools division. |
Richard T. Rowley | | 58 | | Vice President, Corporate Controller and Chief Accounting Officer
Mr. Rowley joined Adobe in November 2006 as Vice President, and Corporate Controller and Principal Accounting Officer.Controller. Prior to joining Adobe, Mr. RowleyMurphy served as Senior Vice President, Chief Accounting Officer and Corporate Controller Treasurerof Qualcomm Incorporated from September 2014 to March 2017. He previously served as Senior Vice President, Controller and PrincipalChief Accounting Officer of DIRECTV Inc. from November 2007 until August 2014, and Vice President and General Auditor of DIRECTV from October 2004 to November 2007. Prior to joining DIRECTV he worked at Synopsys, Inc.several global companies, including Experian, Nestle, and Atlantic Richfield (ARCO), in a semiconductor design software company, from December 2002 to September 2005variety of finance and from 1999 to December 2002, Mr. Rowleyaccounting roles. He served as Vice President,Director of DirecTV Holdings LLC from November 2007 until August 2014. Mr. Murphy serves on the Corporate ControllerAdvisory Board of the Marshall School of Business at the University of Southern California. He holds an MBA from the Marshall School of Business at the University of Southern California, a B.S. in Accounting from Fordham University and Principal Accounting Officer. From 1994 to 1999, Mr. Rowley served in several finance-related positions at Synopsys. Mr. Rowley is a certified public accountant.Certified Public Accountant.
|
ITEM 1A. RISK FACTORS
As previously discussed, our actual results could differ materially from our forward-looking statements. FactorsBelow we discuss some of the factors that mightcould cause or contribute to such differences include, but are not limited to, those discussed below.these differences. These and many other factors described in this report could adversely affect our operations, performance and financial condition.
If we cannot continue to develop, acquire, market and offer new products and services or enhancements to existing products and services that meet customer requirements, our operating results could suffer.
The process of developing and acquiring new high technology products and services and enhancing existing products and servicesofferings is complex, costly and uncertain. If we fail to anticipate customers’ rapidly changing needs and expectations or adapt to emerging technological trends, our market share and results of operations could suffer. We must make long-term investments, develop, acquire or obtain appropriate intellectual property and commit significant resources before knowing whether our predictions will accurately reflect customer demand for our products and services. If we are unable to extendmisjudge customer needs in the future, our core technologies into new applications and new platforms and to anticipate or respond to technological changes, the market’s acceptance of our products and services could declinemay not succeed and our results would suffer.revenues and earnings may be harmed. Additionally, any delay in the development, production,acquisition, marketing or offeringlaunch of a new product or serviceoffering or enhancement to an existing product or serviceoffering could result in customer attrition or impede our ability to attract new customers, causing a decline in our revenues,revenue, earnings or stock price and weakening our competitive position. We maintain strategic relationships with third parties to market certain of our products and support certain product functionality. If we are unsuccessful in establishing or maintaining our strategic relationships with these third parties, our ability to compete in the marketplace, to reach new customers and geographies or to grow our revenues would be impaired and our operating results would suffer.
We offer our products on a variety of PC, tablet and mobile devices. Recent trends have shown a technological shifthardware platforms. Consumers continue to migrate from personal computers to tablet and mobile devices. If we cannot continue to adaptadapting our products to tablet and mobile devices, or if our business could be harmed. To the extent that consumer purchases of these devices slow down, or to the extent that significant demand arises for ourcompetitors can adapt their products or competitive products on other platforms before we offer our products on those platforms,more quickly than us, our business could be harmed. Releases of new devices or operating systems may make it more difficult for our products to perform or may require significant costs in order for us to adapt our solutions to such devices or operating systems. These potential costs and delays could harm our business.
Introduction of new products, services and business models by existing and new competitors could harm ourOur competitive position and results of operations.operations could be harmed if we do not compete effectively.
The markets for our products and services are characterized by intense competition, evolvingnew industry standards, emerging business andevolving distribution models, limited barriers to entry, disruptive technology developments, short product and service life cycles, customer price sensitivity on the part of customers, and frequent new product introductions including(including alternatives with limited functionality available at lower costs or free of charge.charge). Any of these factors could create downward pressure on pricing and gross margins and could adversely affect our renewal and upgradeupsell and cross-sell rates, as well as our ability to attract new customers. Our future success will depend on our continued ability to enhance and integrate our existing products and services, introduce new products and services onin a timely and cost-effective basis,manner, meet changing customer expectations and needs, extend our core technology into new applications, and anticipate and respond to emerging standards, business models, software delivery methods and other technological developments,developments. Furthermore, some of our competitors and potential competitors enjoy competitive advantages such as greater financial, technical, sales, marketing and other resources, broader brand awareness, and access to larger customer bases. As a result of these advantages, potential and current customers might select the evolutionproducts and emergenceservices of digital application marketplaces asour competitors, causing a direct sales and software delivery environment. These digital application marketplaces often have
exclusive distribution for certain platforms, which may make it more difficult for us to compete in these markets. If any competing products, services or operating systems (that don’t support our solutions) achieve widespread acceptance, our operating results could suffer.market share. In addition, consolidation has occurred among some of the competitors in the markets in which we compete.our competitors. Further consolidations in these markets may subject us to increased competitive pressures and may therefore harm our results of operations.
If we fail to successfully manage transitions toIntroduction of new technology could harm our business models and markets, our results of operations could suffer.operations.
We often release new offeringsThe expectations and employ new software and services delivery methods in connection with our diversification into new business models and markets. It is uncertain whether these strategies will prove successful or whether we will be able to develop the necessary infrastructure and business models more quickly than our competitors. Market acceptanceneeds of new product and service offerings will be dependenttechnology consumers are constantly evolving. Our future success depends on our ability (1) to include functionality and usability that address certain customer requirements where our operating history is less extensive, and (2) to optimally price our products in light of marketplace conditions, our costs and customer demand. New product and service offerings could subject us to increased risk of liability related to the provision of services as well as cause us to incur significant technical, legal or other costs. For example, with our cloud-based services and subscription-based licensing models, such as Creative Cloud, we have entered markets that may not be fully accustomed to cloud-based subscription offerings. Market acceptance of such services is affected by a variety of factors, including information security, reliability, performance, social/community engagement, local government regulations regarding onlineour continued ability to innovate, introduce new products and services efficiently, enhance and user-generated content, the sufficiency of technological infrastructure to supportintegrate our products and services in certain geographies, customer concernsa timely and cost-effective manner, extend our core technology into new applications, and anticipate emerging standards, business models, software delivery methods and other technological developments. Integration of our products and services with entrusting aone another and other companies’ offerings creates an increasingly complex ecosystem that is partly reliant on third party to storeparties. If any disruptive technology, or competing products, services or operating systems that are not compatible with our solutions, achieve widespread acceptance, our operating results could suffer and manage their data, public concerns regarding data privacy and the enactment of laws or regulations that restrict our ability to provide such services to customers in the U.S. or internationally. If we are unable to respond to these threats, our business could be harmed.
From time to time we open-source
The introduction of certain technologies may reduce the effectiveness of our technology initiatives, provide broader open access to our technology, license certain of our technology on a royalty-free basis, and release selected technology for industry standardization. Additionally, customer requirements for open standards or open-source products could impact adoption or use ofproducts. For example, some of our products rely on third-party cookies, which are placed on individual browsers when consumers visit websites that contain advertisements. We use these cookies to help our customers more effectively advertise, gauge the performance of their advertisements, and detect and prevent fraudulent activity. Consumers can block or services. To the extent we incorrectly predict customer requirements for such productsdelete cookies through their browsers or services,“ad-blocking” software or if there is a delay in market acceptanceapplications. The most common Internet browsers allow consumers to modify their browser settings to prevent cookies from being accepted by their browsers, or are set to block third-party cookies by default. Increased use of such productsmethods, software or services, our business could be harmed.
We also devote significant resources to the development of technologies and service offerings in markets where our operating history is less extensive. These new offerings and markets may require a considerable investment of technical, financial, compliance and sales resources, and a scalable organization. Some of our competitors may have advantages over us due to their larger presence, larger developer network, deeper market experience and larger sales, consulting and marketing resources. If we are unable to successfully establish new offerings in light of the competitive environment, our results of operations could suffer.
The increased emphasis on a cloud strategy may give rise to risksapplications that block cookies could harm our business.
Over
Some of our enterprise offerings have extended and complex sales cycles, which can make our sales cycles unpredictable.
Sales cycles for some of our enterprise offerings, including our Adobe Experience Cloud solutions and ETLAs in our Digital Media business, are multi-phased and complex. The complexity in these sales cycles is due to several factors, including:
the past several years,need for our business has shifted away from pre-packaged creative softwaresales representatives to focus on a subscription model that priceseducate customers about the use and deliversbenefit of large-scale deployments of our products and services, including technical capabilities, security features, potential cost savings and return on investment;
the desire of organizations to undertake significant evaluation processes to determine their technology requirements prior to making information technology expenditures;
the need for our representatives to spend a significant amount of time assisting potential customers in a way that differs from the historical pricingtheir testing and delivery methodsevaluation of our creative tools. These changes reflect a significant shiftproducts and services;
intensifying competition within the industry;
the negotiation of large, complex, enterprise-wide contracts;
the need for our customers to obtain requisition approvals from perpetual license sales and distributionvarious decision makers within their organizations due to the complexity of our software in favorsolutions touching multiple departments within customers’ organizations; and
customer budget constraints, economic conditions and unplanned administrative delays.
We spend substantial time and expense on our sales efforts without assurance that potential customers will ultimately purchase our solutions. As we target our sales efforts at larger enterprise customers, these trends are expected to continue and could have a greater impact on our results of providingoperations. Additionally, our customers the right to access certain of our software inenterprise sales pattern has historically been uneven, where a hosted environment or use downloaded software for a specified subscription period. This cloud strategy requires continued investment in product development and cloud operations, and may give rise to a number of risks, including the following:
if customers desire only perpetual licenses or to purchase or renew only point product subscriptions rather than acquire the entire Creative Cloud offering, our subscription sales may lag behind our expectations;
our cloud strategy may raise concerns among our customer base, including concerns regarding changes to pricing over time, service availability, information securityhigher percentage of a cloud solutionquarter’s total sales occur during the final weeks of each quarter, which is common in our industry. Our extended sales cycle for these products and accessservices makes it difficult to files while offline or oncepredict when a subscription has expired;
small businesses and hobbyists may turn to competitive or open-source offerings;
we may be unsuccessful in maintaining our target pricing, new seat adoption and projected renewal rates; we may select a target price that is not optimal and could negatively affect ourgiven sales or earnings; or we may have to rely heavily on promotional rates to achieve target seat adoption, which could reduce average revenue per user;
the removal of general availability of Creative Suite 6 on a perpetual licensing basis from legacy shrinkwrap and volume licensing channels, which we announced during our second quarter of fiscal 2014, could further reduce our revenues in the short term as our business shifts to subscription revenue that is recognized ratably; and
we may incur costs at a higher than forecasted rate as we expand our cloud operations.cycle will close.
Subscription offerings and ETLAscould create risks related to the timing of revenue recognition.
AlthoughWe generally recognize revenue from subscription offerings ratably over the terms of their subscription model is designedagreements, which range from 1 to increase the number of customers who purchase our products and services and create36 months. As a recurring revenue stream that is more predictable, it creates certain risks related to the timing of revenue recognition and potential reductions in cash flows.
A portionresult, most of the subscription-basedsubscription revenue we report in each quarter results fromis the recognitionresult of deferred revenue relating to subscription agreements entered into during previous quarters. A declineAny reduction in new or renewed subscriptions in any perioda quarter may not be immediately reflected in our reported financialrevenue results for that period, butuntil a later quarter. Declines in new or renewed subscriptions may result in a decline indecrease our revenue in future quarters. If we were to experience significant downturnsLower sales, reduced demand for our products and services, and increases in subscription sales and renewal rates, our reported financialattrition rate may not be fully reflected in our results might not reflect such downturnsof operations until future periods. Our subscription model could also make it difficult for us to rapidly increase our revenuesrevenue from subscription-based or hosted services through additional sales in any period, as revenue from new customers will be recognized over the applicable subscription term. Further, any increases in sales under our subscription sales model could result in decreased revenues over the short term if they are offset by a decline in sales from perpetual license customers.
Additionally, in connection with our sales efforts to enterprise customers and our use of ETLAs, a number of factors could affect our revenues,revenue, including longer than expectedlonger-than-expected sales and implementation cycles, potential deferral of revenue due to multiple-element revenue arrangements and alternatealternative licensing arrangements. If any of our assumptions about revenue from our new businesses or our addition of a subscription-based modelofferings prove incorrect, our actual results may vary materially from those anticipated, estimated or projected.anticipated.
We may be unableIf our customers fail to predict subscription renewal rates and the impact these rates may have onrenew subscriptions in accordance with our expectations, our future revenue and operating results.results could suffer.
The hosted business model we utilize in ourOur Adobe MarketingExperience Cloud, Creative Cloud, and Document Cloud offerings typically involves selling services on ainvolve subscription basisbased offerings pursuant to product and service agreements. Revenue from our subscription customers is generally recognized ratably over the term of their agreements, that are generally onewhich typically range from 1 to three years in length.36 months. Our individual Creative Cloud subscription agreements are generally month-to-month or one year in length, ETLAs for our Digital Media products and services are generally three years in length, and subscription agreements for other products and services may provide for shorter or longer terms. Although many of our service and subscription agreements contain automatic renewal terms, our customers have no obligation to renew their subscriptions for our services after the expiration of their initial subscription period, and some customers electmay not to renew. We cannot provide assurance that theserenew their subscriptions will be renewed at the same or higher level of service, for the same number of seats/licensesseats or for the same duration of time, if at all. Moreover, under certain circumstances, some of our customers have the right to cancel their service agreements prior to the expiration of the termsterms. Our varied customer base combined with the flexibility we offer in the length of their agreements. Weour subscription-based agreements complicates our ability to precisely forecast renewal rates. Therefore, we cannot be assuredprovide assurance that we will be able to accurately predict future customer renewal rates.
Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our services, our ability to continue enhancing features and functionality, the reliability (including uptime) of our subscription services,offerings, the prices of offerings and those offered by our services,competitors, the actual or perceived information security of our systems and services, decreases in the pricessize of services offered by our competitors, mergers and acquisitions affecting our customer base, reductions in our customers’ spending levels or declines in customer activity as a result of economic downturns or uncertainty in financial markets. If our customers do not renew their subscriptions for our services or if they renew on terms less favorable terms to us, our revenuesrevenue may decline.
Our future growthSecurity breaches in data centers we manage, or third parties manage on our behalf, may compromise the confidentiality, integrity, or availability of employee and customer data, which could expose us to liability and adversely affect our reputation and business.
We process and store significant amounts of employee and customer data, most of which is hosted by third-party service providers. A security incident impacting our own data centers or those controlled by our service providers may compromise the confidentiality, integrity or availability of this data. Unauthorized access to or disclosure of data stored by Adobe or our service providers may occur through break-ins, breaches of a secure network by an unauthorized party, employee theft or misuse or other misconduct. It is also possible that unauthorized access to or disclosure of customer data may be obtained through inadequate use of security controls by customers or employees. Accounts created with weak or recycled passwords could allow cyber-attackers to gain access to customer data. Additionally, failure by customers to remove accounts of their own employees, or the granting of accounts by the customer in an uncontrolled manner, may allow for access by former or unauthorized customer representatives. If there were an inadvertent disclosure of customer information, or if a third party were to gain unauthorized access to the information we possess on behalf of our customers, our operations could be disrupted, our reputation could be damaged and we could be subject to claims or other liabilities, regulatory investigations, or fines. In addition, such perceived or actual unauthorized disclosure of the information we collect or breach of our security could damage our reputation, result in the loss of customers and harm our business.
We rely on data centers managed both by Adobe and third parties to host and deliver our services, as well as access, collect, use, transmit, and store data, and any interruptions or delays in these hosted services, or failures in data collection or transmission could expose us to liability and harm our business and reputation.
Much of our business relies on hardware and services that are hosted, managed, and controlled directly by Adobe or third-party service providers, including our online store at adobe.com, Creative Cloud, Document Cloud, and Experience Cloud solutions. We do not have redundancy for all of our systems, many of our critical applications reside in only one of our data centers, and our disaster recovery planning may not account for all eventualities. If our business relationship with a third-party provider of hosting or content delivery services is negatively affected, byor if one of our content delivery suppliers were to terminate its agreement with us, we might not be able to deliver the corresponding hosted offerings to our customers, which could subject us to reputational harm, costly and time intensive notification requirements, and cause us to lose customers and future business. Occasionally, we migrate data among data centers and to third-party hosted environments. If a transition among data centers or to third-party service providers encounters unexpected interruptions, unforeseen complexity, or unplanned disruptions despite precautions undertaken during the process, this may impair our delivery of products and services to customers and result in increased costs and liabilities, which may harm our operating results and our business.
It is also possible that hardware or software failures or errors in our systems (or those of our third-party service providers) could result in data loss or corruption, cause the information that we collect or maintain to be incomplete or contain inaccuracies that our customers regard as significant, or cause us to fail to meet committed service levels or comply with regulatory notification requirements. Furthermore, our ability to sell additional featurescollect and services to our current customers, which depends onreport data may be delayed or interrupted by a number of factors, including access to the Internet, the failure of our network or software systems, security breaches or significant variability in visitor traffic on customer websites. In addition, computer viruses, worms, or other malware may harm our systems, causing us to lose data, and the transmission of computer viruses or other malware could expose us to litigation or regulatory investigation, and costly and time intensive notification requirements.
We may also find, on occasion, that we cannot deliver data and reports to our customers in near real time because of a number of factors, including significant spikes in customer activity on their websites or failures of our network or software. If we fail to plan infrastructure capacity appropriately and expand it proportionally with the needs of our customer base, and we experience a rapid and significant demand on the capacity of our data centers or those of third parties, service outages could occur and our customers could suffer impaired performance of our services. Such a strain on our infrastructure capacity could subject us to regulatory notification requirements, violations of service level agreement commitments, financial liabilities, result in customer dissatisfaction, or harm our business. If we supply inaccurate information or experience interruptions in our ability to capture, store and supply information in near real time or at all, our reputation could be harmed and we could lose customers, or we could be found liable for damages or incur other losses.
Increasing regulatory focus on privacy issues and expanding laws could impact our business models and expose us to increased liability.
U.S. privacy and data security laws apply to our various businesses. We also do business globally in countries that have more stringent data protection laws than those in the United States that may be inconsistent across jurisdictions and are subject to evolving and differing interpretations. Governments, privacy advocates and class action attorneys are increasingly scrutinizing how companies collect, process, use, store, share and transmit personal data. Globally, new laws, such as the General Data Protection Regulation (“GDPR”) in Europe, and industry self-regulatory codes have been enacted and more are being considered that may affect our ability (and our enterprise customers’ satisfaction withability) to reach current and prospective customers, to respond to both enterprise and individual customer requests under the laws (such as individual rights of access, correction, and deletion of their personal information), and to implement our productsbusiness models effectively. These new laws may also impact our innovation and services, the prices ofbusiness drivers in developing new and emerging technologies (e.g., artificial intelligence and machine learning). These requirements, among others, may impact demand for our offerings and general economic conditions. Ifforce us to bear the burden of more onerous obligations in our effortscontracts. Any perception of our practices, products or services as a violation of individual privacy rights may subject us to cross-sellpublic criticism, class action lawsuits, reputational harm, or investigations or claims by regulators, industry groups or other third parties, all of which could disrupt our business and upsellexpose us to increased liability. Additionally, we store information on behalf of our customers and if our customers fail to comply with contractual obligations or applicable laws, it could result in litigation or reputational harm to us.
Transferring personal information across international borders is becoming increasingly complex. For example, European data transfers outside the European Economic Area are unsuccessful,highly regulated. The mechanisms that we and many other companies rely upon for European data transfers (e.g. Privacy Shield and Model Clauses) are being contested in the rate at whichEuropean court system. We are closely monitoring developments related to requirements for transferring personal data outside the EU. These requirements may result in an increase in the obligations required to provide our services in the EU or in sanctions and fines for non-compliance. Several other countries, including Australia and Japan, have also established specific legal requirements for cross-border transfers of personal information. These developments in Europe and elsewhere could harm our business, grows might decline.financial condition and results of operations.
Security vulnerabilities in our products and systems could lead to reduced revenuesrevenue or to liability claims.
Maintaining the security of our products, computers and networks is a critical issue for us and our customers. Security researchers, criminal hackers and other third parties regularly develop new techniques to penetrate computer and network security measures and, as we have previously disclosed, certain parties have in the past managed to breach certain of our data-securitydata security systems and misused certainsome of our systems and software in order to access our end users’ authentication and payment information. In addition, cyber-attackers also develop and deploy viruses, worms, credential stuffing attack tools, and other malicious software programs, some of which may be specifically designed to attack our products, systems, computers or networks. Sophisticated hardware and operating system applications that we producedevelop or procure from third parties may contain defects in design or manufacture, including bugs and other problems that could unexpectedly compromise the security of the system.system or impair a customer’s ability to operate or use our products. The costs to prevent, eliminate, notify affected parties of, or alleviate cybercyber- or other security
problems, bugs, viruses, worms, malicious software programs and security vulnerabilities are significant, and our efforts to address these problems may not be successful or may be delayed and could result in interruptions, delays, cessation of service and loss of existing or potential customers thatcustomers. It is impossible to predict the extent, frequency or impact these problems may impede our sales, manufacturing, distribution or other critical functions, as well as potential liability to the company.have on us.
Outside parties have in the past and may in the future attempt to fraudulently induce our employees or users of our products or services to disclose sensitive information via illegal electronic spamming, phishing or other tactics. Unauthorized parties may also attempt to gain physical access to one of our facilities in order to infiltrate our information systems.systems or attempt to gain logical access to our products, services, or information systems for the purpose of exfiltrating content and data. These actual and potential breaches of our security measures and the accidental loss, inadvertent disclosure or unauthorized dissemination of proprietary information or sensitive, personal or confidential data about us, our employees, or our customers or their end users, including the potential loss or disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our employees, our customers or the individuals affected to a risk of loss or misuse of this information. This may result in litigation and potential liability or fines, for us, orour compliance with costly and time intensive notice requirements, governmental inquiry andor oversight or a loss of customer confidence, any of which could harm our business or damage our brand and reputation, possibly impeding our present and future success in retaining and attracting new customers and thereby requiring time and resources to repair our brand image.and reputation. These risks will likely increase as we expand our hosted offerings, integrate our products and services, and store and process more data, including personal information.
These problems affect our products and services in particular because cyber-attackers tend to focus their efforts on the most popular offerings (such as those with a large bases of users),user base, and we expect them to continue to do so. Critical vulnerabilities may be identified in certainsome of our applications. These vulnerabilities could cause such applications to crash and could allow an attacker to take control of the affected system, which could result in liability to us or limit our ability to conduct our business and deliver our products and services to customers. We devote significant resources to address security vulnerabilities through engineering more secure products, enhancing
security and reliability features in our products and systems, code hardening, conducting rigorous penetration tests, deploying security updates to address security vulnerabilities and improving our incident response time, but these security vulnerabilities cannot be totally eliminated. The cost of these steps could reduce our operating margins, and we may be unable to implement these measures quickly enough to prevent cyber-attackers from gaining unauthorized access into our systems and products. Despite our preventative efforts, actual or perceived security vulnerabilities in our products and systems may harm our reputation or lead to claims against us (and have in the past leadled to such claims), and could lead some customers to seek to return products, to stop using certain products or services, to reduce or delay future purchases of products or services, or to use competing products or services. If we do not make the appropriate level of investment in our technology systems or if our systems become out-of-date or obsolete and we are not able to deliver the quality of data security customers require, our business could be adversely affected. Customers may also increase their expenditures onadopt security measures designed to protect their existing computer systems from attack, which could delay adoption of new technologies. Further, if we or our customers are subject to a future attack, or our technology is utilizedused in a third-party attack, we could be subject to costly and time intensive notice requirements, and it may be necessary for us to take additional extraordinary measures and make additional expenditures to take appropriate responsive and preventative steps. Any of these events could adversely affect our revenuesrevenue or margins. Moreover, delayed sales, lower margins or lost customers resulting from the disruptions ofcaused by cyber-attacks or preventative measures could adversely affect our financial results, stock price and reputation.
SomeWe may not realize the anticipated benefits of our linespast or future investments or acquisitions, and integration of business rely on us or our third-party service providers to host and deliver services and data, and any interruptions or delays in these hosted services, security or privacy breaches, or failures in data collection could expose us to liability and harmacquisitions may disrupt our business and reputation.management.
We may not realize the anticipated benefits of an investment or acquisition of a company, division, product or technology, each of which involves numerous risks. These risks include:
inability to achieve the financial and strategic goals for the acquired and combined businesses;
difficulty in, and the cost of, effectively integrating the operations, technologies, products or services, and personnel of the acquired business;
entry into markets in which we have minimal prior experience and where competitors in such markets have stronger market positions;
disruption of our ongoing business and distraction of our management and other employees from other opportunities and challenges;
inability to retain personnel of the acquired business;
inability to retain key customers, distributors, vendors and other business partners of the acquired business;
inability to take advantage of anticipated tax benefits;
incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;
elevated delinquency or bad debt write-offs related to receivables of the acquired business we assume;
increased accounts receivables collection times and working capital requirements associated with acquired business models;
additional costs of bringing acquired companies into compliance with laws and regulations applicable to a multinational corporation;
difficulty in maintaining controls, procedures and policies during the transition and integration;
impairment of our relationships with employees, customers, partners, distributors or third-party providers of our technologies, products or services;
failure of our due diligence processes to identify significant problems, liabilities or other challenges of an acquired company or technology;
exposure to litigation or other claims in connection with, or inheritance of claims or litigation risk as a result of, an acquisition, such as claims from terminated employees, customers, former stockholders or other third parties;
incurring significant exit charges if products or services acquired in business combinations are unsuccessful;
inability to conclude that our internal controls over financial reporting are effective;
inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions;
the failure of strategic investments to perform as expected or to meet financial projections;
delay in customer and distributor purchasing decisions due to uncertainty about the direction of our product and service offerings; and
incompatibility of business cultures.
Mergers and acquisitions of technology companies are inherently risky. If we do not complete an announced acquisition transaction or integrate an acquired business successfully and in a timely manner, we may not realize the benefits of the acquisition to the extent anticipated, and in certain circumstances an acquisition could harm our financial position.
Changes in accounting principles, or interpretations thereof, could have a significant impact on our financial position and results of operations.
We prepare our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles, how the principles are interpreted, or the adoption of new accounting principles can have a significant effect on our reported results, and could even retroactively affect previously reported transactions, and may require that we make significant changes to our systems, processes and controls.
Changes resulting from these new standards may result in materially different financial results and may require that we change how we process, analyze and report financial information and that we change financial reporting controls. For additional information regarding these updated standards, see the section titled “Recent Accounting Pronouncements Not Yet Effective” within Part II. Item 8, Note 1. Basis of Presentation and Summary of Significant Accounting Policies.
Such changes in accounting principles may have an adverse effect on our business, financial position, and income, or cause an adverse deviation from our revenue and profitability targets, which may negatively impact our financial results.
Changes in tax rules and regulations, or interpretations thereof, may adversely affect our effective tax rates.
We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. In addition to providing for U.S. income taxes on earnings from the United States, we provide for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the United States. While, as of the balance sheet date, we do not anticipate changing our intention regarding permanently reinvested earnings, if certain foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings.
Our income tax expense has differed from the tax computed at the U.S. federal statutory income tax rate due primarily to discrete items and to earnings considered as permanently reinvested in foreign operations. Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in the tax rates in jurisdictions where our income is earned, by changes in or our interpretation of tax rules and regulations in the jurisdictions in which we do business, by unanticipated decreases in the amount of earnings in countries with low statutory tax rates, by unexpected negative changes in business and market conditions that could reduce certain tax benefits, or by changes in the valuation of our deferred tax assets and liabilities.
In addition, in the United States, the European Commission, countries in the European Union and other countries where we do business, 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 and other governmental bodies have or could make unprecedented assertions about how earnings in their jurisdictions might be determined that are contrary to the way in which we have interpreted and historically applied the rules and regulations described above in our income tax returns filed 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 U.S. Internal Revenue Service (“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.
The success of some of our product and service offerings depends on our ability to continue to attract and retain customers of and contributors to our online marketplaces for creative content.
The success of some of our product and service offerings, such as Adobe Stock, depends on our ability to continue to attract new customers and contributors to these online marketplaces for creative content, as well as our ability to continue to retain existing customers and contributors. An increase in paying customers has generally resulted in more content from contributors, which increases the size of our collection and in turn attracts new paying customers. We rely on the functionality and features of our online marketplaces, the size and content of our collection and the effectiveness of our marketing efforts to attract new customers and contributors and retain existing ones. New technologies may render the features of our online marketplaces obsolete, our collection may fail to grow as anticipated or our marketing efforts may be unsuccessful, any of which may adversely affect our results of operations.
We face various risks associated with our operating as a multinational corporation.
As a global business that generates approximately 42% of our total revenue from sales to customers outside of the Americas, we are subject to a number of risks, including:
foreign currency fluctuations and controls;
international and regional economic, political and labor conditions, including any instability or security concerns abroad;
tax laws (including U.S. taxes on foreign subsidiaries);
increased financial accounting and reporting burdens and complexities;
changes in, or impositions of, legislative or regulatory requirements;
changes in laws governing the free flow of data across international borders;
failure of laws to protect our intellectual property rights adequately;
inadequate local infrastructure and difficulties in managing and staffing international operations;
delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers;
the imposition of governmental economic sanctions on countries in which we do business or where we plan to expand our business;
costs and delays associated with developing products in multiple languages;
operating in locations with a higher incidence of corruption and fraudulent business practices; and
other factors beyond our control, such as terrorism, war, natural disasters and pandemics.
Some of our lines ofthird-party business partners have international operations and services, including our online store at adobe.com, Creative Cloud, other hosted Digital Media offeringsare also subject to these risks and our Adobe Marketing Cloud solutions, rely on hardware and services hosted and controlled directly by us or byif our third-party service providers. We do not have redundancy for all of our systems, many of our critical applications reside in only one of our data centers, and our disaster recovery planning may not account for all eventualities. Ifbusiness partners are unable to appropriately manage these risks, our business relationship with a third-party provider of hosting or content delivery services is negatively affected, or if one of our content delivery suppliers were to terminate their agreement with us, we might not be able to deliver the corresponding hosted offerings to our customers, which could subject us to reputational harm and cause us to lose customers and future business, reducing our revenues.
We hold large amounts of customer data, some of which is hosted in third-party facilities. A security incident at those facilities or ours may compromise the confidentiality, integrity or availability of customer data. Unauthorized access to customer data stored on our computers or networks may be obtained through break-ins, breach of our secure network by an unauthorized party, employee theft or misuse, or other misconduct. It is also possible that unauthorized accessharmed. If sales to customer data may be obtained through inadequate use of security controls by customers. While our products and services provide and support strong password controls, IP restriction and account controls, their use is controlled by the customer. Accounts created with weak passwords could allow cyber-attackers to gain access to customer data. Additionally, failure by customers to remove accounts of their own employees, or granting of accounts by the customer in an uncontrolled manner, may allow for access by former or unauthorized customer representatives. If there were an inadvertent disclosure of personal information, or if a third party were to gain unauthorized access to the personal information we possess on behalfany of our customers outside of the Americas are reduced, delayed or canceled because of any of the above factors, our operations could be disrupted, our reputation could be damaged and we could berevenue may decline.
We are subject to claims or other liabilities. In addition, such perceived or actual unauthorized disclosure of
the information we collect or breach of our security could damage our reputation, result in the loss of customersrisks associated with compliance with laws and regulations globally, which may harm our business.
Because of the large amount of data that we collectWe are a global company subject to varied and manage on behalf of our customers, it is possible that hardware or software failures or errors in our systems (or those of our third-party service providers) could result in data loss or corruption or cause the information that we collectcomplex laws, regulations and customs, both domestically and internationally. These laws and regulations relate to be incomplete or contain inaccuracies that our customers regard as significant. Furthermore, our ability to collect and report data may be delayed or interrupted by a number of factors, including access to the internet, the failureaspects of our networkbusiness, including trade protection, import and export control, data and transaction processing security, payment card industry data security standards, records management, user-generated content hosted on websites we operate, privacy practices, data residency, corporate governance, anti-trust and competition, employee and third-party complaints, anti-corruption, gift policies, conflicts of interest, securities regulations and other regulatory requirements affecting trade and investment. The application of these laws and regulations to our business is often unclear and may at times conflict. For example, in many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by U.S. regulations applicable to us, including the Foreign Corrupt Practices Act. We cannot provide assurance that our employees, contractors, agents, and business partners will not take actions in violation of our internal policies or software systems, security breachesU.S. laws. Compliance with these laws and regulations may involve significant costs or significant variabilityrequire changes in visitor trafficour business practices that result in reduced revenue and profitability. Non-compliance could also result in fines, damages, criminal sanctions against us, our officers or our employees, prohibitions on customer websites. the conduct of our business, and damage to our reputation.
In addition, computer viruses may harm our systems causing us to lose data, and the transmission of computer viruses could expose us to litigation. We may also find, on occasion, that we cannot deliver data and reports to our customers in near real time because of a number of factors, including significant spikes in customer activity on their websites or failuresapproximately 52% of our network or software. Ifemployees are located outside the United States. Accordingly, we supply inaccurate information or experience interruptionsare exposed to changes in laws governing our ability to capture, storeemployee relationships in various U.S. and supply information in near real time or at all,foreign jurisdictions, including laws and regulations regarding wage and hour requirements, fair labor standards, employee data privacy, unemployment tax rates, workers’ compensation rates, citizenship requirements and payroll and other taxes, which likely would have a direct impact on our reputation could be harmed and we could lose customers, or we could be found liable for damages or incur other losses.operating costs.
Uncertainty about current and future economic conditions and other adverse changes in general political conditions in any of the major countries in which we do business could adversely affect our operating results.
As our business has grown, we have become increasingly subject to the risks arising from adverse changes in economic and political conditions, both domestically and globally. Uncertainty about the effects of current and future economic and political conditions on us, our customers, suppliers and partners makes it difficult for us to forecast operating results and to make decisions about future investments. If economic growth in countries where we do business slows, customers may delay or reduce technology purchases, advertising spending or marketing spending. This could result in reductions in sales of our products and services, longermore extended sales cycles, slower adoption of new technologies and increased price competition. OurAmong our customers includeare government entities, including the U.S. federal government, and our revenue could decline if spending cuts impedeimpact the government’s ability to purchase our products and solutions, our revenues could decline.services. Deterioration in economic conditions in any of the countries in which we do business could also cause slower or impaired collections on accounts receivable, which may adversely impact our liquidity and financial condition.
There could be a number of effects from a financial institution credit crisis on our business, which could include impaired credit availability and financial stability of our customers, including our distribution partners and channels. A disruption in the financial markets may also have an effect on our derivative counterparties and could also impair our banking partners, on which we rely for operating cash management.management and affect our derivative counterparties. Any of these events would likely harm our business, financial condition, and results of operations and financial condition.operations.
Political instability or adverse political developments in or around any of the major countries in which we do business would also likely harm our business, results of operations and financial condition.
We may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions may disrupt our business and management.
We may not realize the anticipated benefits of an acquisition of a company, division, product or technology, each of which involves numerous risks. These risks include:
difficulty in integrating the operations and personnel of the acquired company;
difficulty in effectively integrating the acquired technologies, products or services with our current technologies, products or services;
difficulty in maintaining controls, procedures and policies during the transition and integration;
entry into markets in which we have minimal prior experience and where competitors in such markets have stronger market positions;
disruption of our ongoing business and distraction of our management and other employees from other opportunities and challenges;
inability to retain personnel of the acquired business;
inability to retain key customers, distributors, vendors and other business partners of the acquired business;
inability to achieve the financial and strategic goals for the acquired and combined businesses;
inability to take advantage of anticipated tax benefits as a result of unforeseen difficulties in our integration activities;
incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;
potential additional exposure to fluctuations in currency exchange rates;
potential additional costs of bringing acquired companies into compliance with laws and regulations applicable to us as a multi-national corporation;
potential impairment of our relationships with employees, customers, partners, distributors or third-party providers of our technologies, products or services;
potential failure of the due diligence processes to identify significant problems, liabilities or other challenges of an acquired company or technology, including but not limited to, issues with the acquired company’sOur intellectual property product quality or product architecture, data back-upportfolio is a valuable asset and security (including security from cyber-attacks), privacy practices, revenue recognition or other accounting practices, employee, customer or partner issues or legal and financial contingencies;
exposure to litigation or other claims in connection with, or inheritance of claims or litigation risk as a result of, an acquisition, including but not limited to claims from terminated employees, customers, former stockholders or other third parties;
incurring significant exit charges if products or services acquired in business combinations are unsuccessful;
potential inability to assert that internal controls over financial reporting are effective;
potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions;
potential delay in customer and distributor purchasing decisions due to uncertainty about the direction of our product and service offerings; and
potential incompatibility of business cultures.
Mergers and acquisitions of high technology companies are inherently risky. If we do not complete an announced acquisition transaction or integrate an acquired business successfully and in a timely manner, we may not realizebe able to protect our intellectual property rights, including our source code, from infringement or unauthorized copying, use or disclosure.
Our intellectual property portfolio is a valuable asset. Infringement or misappropriation of our patents, trademarks, trade secrets, copyrights and other intellectual property rights could result in lost revenues and ultimately reduce their value. Preventing unauthorized use or infringement of our intellectual property rights is inherently difficult. We actively combat software piracy as we enforce our intellectual property rights, but we nonetheless lose significant revenue due to illegal use of our software. If piracy activities continue at historical levels or increase, they may further harm our business. We apply for patents in the benefitsU.S. and internationally to protect our newly created technology and if we are unable to obtain patent protection for the technology described in our pending patent, or if the patent is not obtained timely, this could result in revenue loss, adverse effects on operations, and harm to our business. We offer our products and services in foreign countries and we may seek intellectual property protection from those foreign legal systems. Some of those foreign countries may not have as robust or comprehensive of intellectual property protection laws and schemes as those offered in the acquisitionU.S. In some foreign countries, the mechanisms to the extent anticipated, and in certain circumstances an acquisitionenforce intellectual property rights may be inadequate to protect our technology, which could harm our financial position.business.
If unauthorized disclosure of our source code occurs through security breach, cyber-attack or otherwise, we could lose future trade secret protection for that source code. The loss of future trade secret protection could make it easier for third parties to compete with our products by copying functionality, which could cause us to lose customers and could adversely affect our revenue and operating margins. We also seek to protect our confidential information and trade secrets through the use of non-disclosure
agreements with our customers, contractors, vendors and partners. However, there is a risk that our confidential information and trade secrets may be disclosed or published without our authorization, and in these situations, enforcing our rights may be difficult or costly.
We may incur substantial costs enforcing or acquiring intellectual property rights and defending against third-party claims as a result of litigation or other proceedings.third parties alleging that we infringe their proprietary rights.
In connection with the enforcement of our own intellectual property rights, the acquisition of third-party intellectual property rights, or disputes relating to the validity or alleged infringement of third-party intellectual property rights, including patent rights, we
We have been, are currently, and may in the future be, subject to claims, negotiations orand complex, protracted litigation.litigation relating to disputes regarding the validity or alleged infringement of third-party intellectual property rights, including patent rights. Intellectual property disputes and litigation are typically costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully defended or resolved many past lawsuits and other disputes, weWe may not prevail in the future.every lawsuit or dispute. Third-party intellectual property disputes, including those initiated by patent assertion entities, could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from licensing certain of our products or offering certain of our services, subject us to injunctions restricting our sale of products or services, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers, including contractual provisions under various license arrangements and service agreements. In addition, we may incur significant costs in acquiring the necessary third-party intellectual property rights for use in our products, in some cases to fulfill contractual obligations with our customers. Any of these occurrences could significantly harm our business.
We may incur losses associated with currency fluctuations and may not be able to protecteffectively hedge our intellectual property rights, includingexposure.
Our operating results are subject to fluctuations in foreign currency exchange rates due to the global scope of our source code, from third-party infringers or unauthorized copying, use or disclosure.
Although we vigorously defend our intellectual property rights andbusiness. We attempt to combat unlicensed copying, accessmitigate a portion of these risks through foreign currency hedging based on our judgment of the appropriate trade-offs among risk, opportunity and useexpense. We regularly review our program to partially hedge our exposure to foreign currency fluctuations and make adjustments as necessary. Our hedging activities may not offset more than a portion of software and intellectual property through a variety of techniques, preventing unauthorized use or infringement of our rights is inherently difficult. We actively combat software piracy as we enforce our intellectual property rights, but we nonetheless lose significant revenue due to illegal use of our software. If piracy activities continue at historical levels or increase, they may further harm our business.
Additionally, we take significant measures to protect the secrecy of our confidential information and trade secrets, including our source code. Despite these measures, as we have previously disclosed, hackers have managed to access certain of our source code and may obtain accessadverse financial impact resulting from unfavorable movement in the future. If unauthorized disclosure of our source code occurs through security breach, cyber-attack or otherwise, we could potentially lose future trade secret protection for that source code. The loss of future trade secret protection could make it easier for third parties to compete with our products by copying functionality,foreign currency exchange rates, which could cause us to lose customers and could adversely affect our revenuefinancial condition or results of operations.
Failure of our third-party customer service and operating margins. We also seektechnical support providers to protectadequately address customers’ requests could harm our confidential informationbusiness and trade secrets through the use of non-disclosure agreementsadversely affect our financial results.
Our customers rely on our customer service support organization to resolve issues with our products and services. We outsource a substantial portion of our customer service and technical support activities to third-party service providers. We depend heavily on these third-party customer service and technical support representatives working on our behalf, and we expect to continue to rely heavily on third parties in the future. This strategy presents risks to our business due to the fact that we may not be able to influence the quality of support as directly as we would be able to do if our own employees performed these activities. Our customers contractors, vendorsmay react negatively to providing information to, and partners. However, there is a risk thatreceiving support from, third-party organizations, especially if these third-party organizations are based overseas. If we encounter problems with our confidential informationthird-party customer service and trade secretstechnical support providers, our reputation may be disclosed or published without our authorization, and in these situations enforcing our rights may be difficult or costly.
Increasing regulatory focus on privacy issues and expanding laws and regulations could impact our new business models and expose us to increased liability.
Our industry is highly regulated, including for privacy and data security. We are also expanding our business in countries that have more stringent data protection laws than those in the U.S. Privacy laws globally are changing and evolving. Governments, privacy advocates and class action attorneys are increasingly scrutinizing how companies collect, process, use, store, share or transmit personal data. New laws and industry self-regulatory codes have been enacted and more are being considered that may affectharmed, our ability to reach currentsell our offerings could be adversely affected, and prospective customers, to understand how our products and services are being used, to respond to customer requests allowed under the laws, and to implement our new business models effectively. These new laws and regulations would similarly affect our competitors as well as our customers. Any perception of our practices or products as an invasion of privacy, whether or not consistent with current regulations and industry practices, may subject us to public criticism, class action lawsuits, reputational harm or claims by regulators, industry groups or other third parties, all of which could disrupt our business and expose us to increased liability. Additionally, both laws regulating privacy, as well as third-party products addressing perceived privacy concerns, could affect the functionality of and demand for our products, thereby harming our revenues.
On behalf of certain customers, we collect and store anonymous and personal information derived from the activities of end users with various channels, including traditional websites, mobile websites and applications, email interactions, direct mail, point of sale, text messaging and call centers (collectively, “channels”). This enables us to provide such customers with reports on aggregated anonymous or personal information from and about end-user interactions with various channels in the manner specifically directed by each such individual customer. Federal, state and foreign governments and agencies have adopted or are considering adopting laws regarding the collection, use and disclosure of this information. Our compliance with privacy laws and regulations and our reputation among the public body of end users depend in part on such customers’ adherence to privacy laws and regulations and their use of our services in ways consistent with such end users’ expectations. We also rely on representations made to us by customers that their own use of our services and the information they provide to us via our services do not violate any applicable privacy laws, rules and regulations or their own privacy policies. We ask customers to represent to us that they provide their end users the opportunity to “opt-out” of the information collection associated with our services, as applicable. We do not formally audit such customers to confirm compliance with these representations. If these representations are false or if such customers do not otherwise comply with applicable privacy laws, we could face adverse publicitylose customers and possible legal or other regulatory action. In addition, some countries are considering enacting laws that would expand the scope of privacy-related obligations required of service providers, such as Adobe, that would require additional compliance expense and increased liability.
If we fail to process transactions effectively or fail to adequately protect against disputed or potential fraudulent activities, our revenue and earnings may be harmed.
We process a significant volume of transactions on a daily basis in both our Digital Marketing and Digital Media businesses. Due to the size and volume of transactions that we handle, effective processing systems and controls are essential; but even the most sophisticated systems and processes may not be effective in preventing all errors. The systems supporting our business are comprised of multiple technology platforms that may be difficult to scale. If we are unable to effectively manage these systems and processes, we may be unable to process customer data in an accurate, reliable and timely manner, which may harm our customer relationships or results of operations.associated revenue.
Failure to manage our sales and distribution channels and third-party customer service and technical support providers effectively could result in a loss of revenue and harm to our business.
We contract with a number of software distributors and other strategic partners, none of which is individually responsible for a material amount of our total net revenue for any recent period. IfNonetheless, if any single agreement with one of our distributors were terminated, we believe we could make arrangements with new or existing distributors to distribute our products without a substantial disruption to our business; however, any prolonged delay in securing a replacement distributor could have a negative short-term impact on our results of operations.
Successfully managing our indirect distribution channel efforts to reach various customer segments for our products and services is a complex process across the broad range of geographies where we do business or plan to do business. Our distributors and other channel partners are independent businesses that we do not control. Notwithstanding the independence of our channel partners, we face potential legal risk and potential reputational harm from the activities of these third parties including, but not limited to, export control violations, workplace conditions, corruption and anti-competitive behavior. Although we have undertaken efforts to reduce these third-party risks, they remain present.
We cannot be certain that our distribution channel will continue to market or sell our products and services effectively. If our distribution channel is not successful, we may lose sales opportunities, customers and revenues.
revenue. Our distributors also sell our competitors’ products and services, and if they favor our competitors’ products or services for any reason, they may fail to market our products asor services effectively or to devote resources necessary to provide effective sales, which would cause our results to suffer. We also distribute some products and services through our OEM channel, and if our OEMs decide not to bundle our applications on their devices, our results could suffer.
In addition, the financial health of our distributors and our continuing relationships with them are important to our success. Some of these distributors may be adversely impacted by changes to our business model or unable to withstand adverse changes in current
economic conditions, which could result in insolvency, and/or the inability of such distributors to obtain credit to finance purchases of our products. In addition, weaknessproducts and services, or a delay in the end-user market could negatively affect the cash flows of our distributors who could, in turn, delay paying their obligations to us, which would increase our credit risk exposure. Our business could be harmed if the financial condition of some of these distributors substantially weakened and we were unable to timely secure replacement distributors.us.
We also sell certainsome of our products and services through our direct sales force. Risks associated with this sales channel include longermore extended sales and collection cycles associated with direct sales efforts, challenges related to hiring, retaining and motivating our direct sales force, and substantial amounts of ongoing training for sales representatives, including regular updates to cover new and upgraded systems, products and services.representatives. Moreover, recent hires may not become as productive as we would like, as in most cases it takes a significant period of time before they achieve full productivity. Our business could be seriously harmed if theseour expansion efforts do not generate a corresponding significant increase in revenuesrevenue and we are unable to achieve the efficiencies we anticipate. In addition, the loss of key sales employees could impact our customer relationships and future ability to sell to certain accounts covered by such employees.
Contracting with government entities exposes us to additional risks inherent in the government procurement process.
We also provide products and services, directly and indirectly, to a variety of governmentalgovernment entities, both domestically and internationally. Risks associated with licensing and selling products and services to governmentalgovernment entities include longermore extended sales and collection cycles, varying governmental budgeting processes and adherence to complex procurement regulations and other government-specific contractual requirements. Ineffectively managing these risksWe may be subject to audits and investigations relating to our government contracts and any violations could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, payment of fines, and suspension or debarment from future government business, as well as harm to our reputation.reputation and financial results.
We outsource a substantial portion of our customer service and technical support activities to third-party service providers. We rely heavily on these third-party customer service and technical support representatives working on our behalf, and we expect to continue to rely heavily on third parties in the future. This strategy provides us with lower operating costs and greater flexibility, but also presents risks to our business due to the fact that we may not be able to influence the quality of support as directly as we would be able to do if our own employees performed these activities. Our customers may react negatively to providing information to, and receiving support from, third-party organizations, especially if based overseas. If we encounter problems with our third-party customer service and technical support providers, our reputation may be harmed and we could lose customers and associated revenues.
Certain of our enterprise offerings have long and complex sales cycles.
Sales cycles for some of our enterprise offerings, including our Adobe Marketing Cloud Solutions and ETLAs in our Digital Media business, are long and complex. The complexity in these sales cycles is due to a number of factors, including:
the need for our sales representatives to educate customers about the use and benefit of our large-scale deployments of our products and services, including technical capabilities, security features, potential cost savings and return on investment;
the desire of large and medium size organizations to undertake significant evaluation processes to determine their technology requirements prior to making information technology expenditures;
the need for our representatives to spend a significant amount of time assisting potential customers in their testing and evaluation of our products and services;
the negotiation of large, complex, enterprise-wide contracts, as often required by our and our customers’ business and legal representatives;
the need for our customers to obtain requisition approvals from various decision makers within their organizations; and
customer budget constraints, economic conditions and unplanned administrative delays.
We spend substantial time and expense on our sales efforts without any assurance that potential customers will ultimately purchase our solutions. As we target our sales efforts at larger enterprise customers, these trends are expected to continue. Additionally, our enterprise sales pattern has historically been uneven, where a higher percentage of a quarter’s total sales occur during the final weeks of each quarter, which is common in our industry. Our long sales cycle for these products makes it difficult to predict when a given sales cycle will close.
Catastrophic events may disrupt our business.
We are a highly automated business and rely on our network infrastructure and enterprise applications, internal technology systems and our website for our development, marketing, operational, support, hosted services and sales activities. In addition, some of our businesses rely on third-party hosted services, and we do not control the operation of third-party data center facilities serving our customers from around the world, which increases our vulnerability. A disruption, infiltration or failure of these systems or third-party hosted services in the event of a major earthquake, fire, flood, power loss, telecommunications failure, software or hardware malfunctions, cyber-attack, war, terrorist attack or other catastrophic event could cause system interruptions, reputational harm, loss of intellectual property, delays in our product development, lengthy interruptions in our services, breaches of data security and loss of critical data. Any of these events could prevent us from fulfilling our customers’ orders. Our corporate headquarters, a significant portion of our research and development activities, certain of our data centers and certain other critical business operations are located in the San Francisco Bay Area, and additional facilities where we conduct significant operations are located in the Salt Lake Valley Area, both of which are near major earthquake faults. We have developed certain disaster recovery plans and backup systems to reduce the potentially adverse effect of such events, but a catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected.
Net revenue,Revenue, margin or earnings shortfalls or the volatility of the market generally may cause the market price of our stock to decline.
TheIn the past, the market price for our common stock has in the past experienced significant fluctuations and it may fluctuate significantlydo so in the future. A number of factors may affect the market price for our common stock, including:such as:
shortfalls in, or changes in expectations about our revenue, margins, earnings, the numberAnnualized Recurring Revenue (“ARR”), sales of paid Creative Cloud subscribers, ARR, bookings within our Adobe MarketingExperience Cloud businessofferings, or other key performance metrics;
changes in estimates or recommendations by securities analysts;
whether our results meet analysts’ expectations;
compression or expansion of multiples used by investors and analysts to value high technology SaaS companies;
the announcement of new products or services, product enhancements, or service introductions, strategic alliances or significant agreements by us or our competitors;
the loss of a large customercustomers or our inability to increase sales to existing customers, retain customers or attract new customers;
recruitment or departure of key personnel;
variations in our or our competitors’ results of operations, changes in the competitive landscape generally and developments in our industry;
general socio-economic, political or market conditions; and
unusual events such as significant acquisitions by us or our competitors, divestitures, litigation, general socio-economic, regulatory political or market conditionsactions and other factors, including factors unrelated to our operating performance.
We are subject to risks associated with compliance with laws and regulations globally
In addition, the market for technology stocks or the stock market in general may experience uneven investor confidence, which may harmcause the market price for our common stock to decline for reasons unrelated to our operating performance. Volatility in the market price of a company’s securities for a period of time may increase the company’s susceptibility to securities class action litigation. Oftentimes, this type of litigation is expensive and diverts management’s attention and resources which may adversely affect our business.
We
If we are a global company subjectunable to variedrecruit and complex laws, regulations and customs domestically and internationally. These laws and regulations relate to a number of aspectsretain key personnel, our business may be harmed.
Much of our business, including trade protection, import and export control, data and transaction processing security, payment card industry data security standards, records management, user-generated content hosted on websites we operate, privacy practices, corporate governance, employee and third-party complaints, gift policies, conflicts of interest, employment and labor relations laws, securities regulations and other regulatory requirements affecting trade and investment. The application of these laws and regulations to our business is often unclear and may at times conflict. Compliance with these laws and regulations may involve significant costs or require changes in our business practices that result in reduced revenue and profitability. Non-compliance could also result in fines, damages, criminal sanctions against us, our officers or our
employees, prohibitionsfuture success depends on the conductcontinued service, availability and performance of our business,senior management. These individuals have acquired specialized knowledge and damageskills with respect to our reputation. We incur additional legal compliance costs associated with our global operations and could become subject to legal penalties if we fail to comply with local laws and regulations in U.S. jurisdictions or in foreign countries, which laws and regulations may be substantially different from those in the U.S. In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by U.S. regulations applicable to us, including the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, including those based in or from countries where practices that violate such U.S. laws may be customary, will not take actions in violation of our internal policies. Any such violation, even if prohibited by our internal policies, could have an adverse effect on our business.
As a global business that generates approximately 44% of our total revenue from sales to customers outside of the Americas, we are subject to a number of risks, including:
foreign currency fluctuations;
changes in government preferences for software procurement;
international economic, political and labor conditions;
tax laws (including U.S. taxes on foreign subsidiaries);
increased financial accounting and reporting burdens and complexities;
unexpected changes in, or impositions of, legislative or regulatory requirements;
changes in laws governing the free flow of data across international borders;
failure of laws to protect our intellectual property rights adequately;
inadequate local infrastructure and difficulties in managing and staffing international operations;
delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers;
the imposition of governmental economic sanctions on countries in which we do business or where we plan to expand our business;
transportation delays;
operating in locations with a higher incidence of corruption and fraudulent business practices; and
other factors beyond our control, including terrorism, war, natural disasters and pandemics.
If sales to any of our customers outside of the Americas are delayed or canceled becauseAdobe. The loss of any of these individuals could harm our business, especially if we have not been successful in developing adequate succession plans. Our business is also dependent on our ability to retain, hire and motivate talented, highly skilled personnel across all levels of our organization. Experienced personnel in the above factors, our revenues may decline.
In addition, approximately 52% ofinformation technology industry are in high demand and competition for their talents is intense in many areas where our employees are located outside the U.S. Accordingly,located. We may experience higher compensation costs to retain senior management and experienced personnel that may not be offset by improved productivity or increased sales. If we are exposedunable to changescontinue to successfully attract and retain key personnel, our business may be harmed.
We continue to hire personnel in laws governing our employee relationships in various U.S. and foreign jurisdictions, including laws and regulations regarding wage and hour requirements, fair labor standards, employee data privacy, unemployment tax rates, workers’ compensation rates, citizenship requirements and payrollcountries where exceptional technical knowledge and other taxes,expertise are offered at lower costs, which likely would have a directincreases the efficiency of our global workforce structure and reduces our personnel related expenditures. Nonetheless, as globalization continues, competition for these employees in these countries has increased, which may impact on our operating costs.ability to retain these employees and increase our expenses resulting from competitive compensation. We may continue to expand our international operations and international sales and marketing activities. Expansion in international markets has required, and will continue toactivities, which would require significant management attention and resources. We may be unable to scale our infrastructure effectively or as quickly as our competitors in these markets, and our revenuesrevenue may not increase to offset these expected increases in costs and operating expenses, which would causecausing our results to suffer.
We believe that a critical contributor to our success to date has been our corporate culture, which we have built to foster innovation, teamwork and employee satisfaction. As we grow, including from the integration of employees and businesses acquired in connection with previous or future acquisitions, we may incur losses associated with currency fluctuationsfind it difficult to maintain important aspects of our corporate culture, which could negatively affect our ability to retain and recruit personnel who are essential to our future success.
If our goodwill or amortizable intangible assets become impaired, then we could be required to record a significant charge to earnings.
GAAP requires us to test for goodwill impairment at least annually. In addition, we review our goodwill and amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be able to effectively hedgerecoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our exposure.
Our operating results are subject to fluctuationsgoodwill or amortizable intangible assets may not be recoverable include declines in foreign currency exchange rates. We attempt to mitigate a portion of these risks through foreign currency hedging, based onstock price, market capitalization or cash flows, and slower growth rates in our judgment of the appropriate trade-offs among risk, opportunity and expense. We have established a hedging program to partially hedge our exposure to foreign currency exchange rate fluctuations for various currencies. We regularly review our hedging program and make adjustments as necessary basedindustry. Depending on the factors discussed above. Our hedging activities may not offset more thanresults of our review, we could be required to record a portion of the adverse financial impact resulting from unfavorable movementsignificant charge to earnings in foreign currency exchange rates, which could adversely affect our financial conditionstatements during the period in which any impairment of our goodwill or amortizable intangible assets were determined, negatively impacting our results of operations.
We have issued $1.5$1.9 billion of notes in a debt offeringofferings and may incur other debt in the future, which may adversely affect our financial condition and future financial results.
We have $1.5$1.9 billion in senior unsecured notes outstanding. We also have a $1.0$1 billion senior unsecured revolving credit facility,agreement, which is currently undrawn. This debt may adversely affect our financial condition and future financial results by, among other things:
increasing our vulnerability to adverse changes in general economic and industry conditions;
requiring the dedication of a portion of our expected cash flow from operations to service our indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and acquisitions; and
limiting our flexibility in planning for, or reacting to, changes in our business and our industry.
Our senior unsecured notes and senior unsecured revolving credit facilityagreement impose restrictions on us and require us to maintain compliance with specified covenants. Our ability to comply with these covenants may be affected by events beyond our control. If we breach any of the covenants and do not obtain a waiver from the lenders or noteholders, then, subject to applicable cure periods, any outstanding indebtedness may be declared immediately due and payable.
In addition, changes by any rating agency to our credit rating may negatively impact the value and liquidity of both our debt and equity securities, as well as the potential costs associated with a refinancing of our debt. Under certain circumstances, if our credit ratings are downgraded or other negative action is taken, the interest rate payable by us under our revolving credit facility could increase. Downgrades in our credit ratings could also affect the terms of any such financing and restrict our ability to obtain additional financing in the future and could affect the terms of any such financing.future.
Changes in, or interpretations of, accounting principles could have a significant impact on
Catastrophic events may disrupt our financial position and results of operations.
We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Additionally, the adoption of new or revised accounting principles may require that we make significant changes to our systems, processes and controls.
For example, the U.S.-based Financial Accounting Standards Board (“FASB”) is currently working together with the International Accounting Standards Board (“IASB”) on several projects to further align accounting principles and facilitate more comparable financial reporting between companies who are required to follow GAAP under SEC regulations and those who are required to follow International Financial Reporting Standards outside of the U.S. These efforts by the FASB and IASB may result in different accounting principles under GAAP that may result in materially different financial results for us in areas including, but not limited to, principles for recognizing revenue and lease accounting. Additionally, significant changes to GAAP resulting from the FASB's and IASB's efforts may require that we change how we process, analyze and report financial information and that we change financial reporting controls.
If our goodwill or amortizable intangible assets become impaired we could be required to record a significant charge to earnings.
Under GAAP, we review our goodwill and amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. GAAP requires us to test for goodwill impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include declines in stock price, market capitalization or cash flows and slower growth rates in our industry. We could be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets were determined, negatively impacting our results of operations.
Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.business.
We are a United States-based multinational company subject to taxhighly automated business and rely on our network infrastructure and enterprise applications, internal technology systems and website for our development, marketing, operations, support, hosted services and sales activities. In addition, some of our businesses rely on third-party hosted services, and we do not control the operation of third-party data center facilities serving our customers from around the world, which increases our vulnerability. A disruption, infiltration or failure of these systems or third-party hosted services in multiple U.S.the event of a major earthquake, fire, flood, tsunami or other weather event, power loss, telecommunications failure, software or hardware malfunctions, pandemics, cyber-attack, war, terrorist attack or other catastrophic event that our disaster recovery plans do not adequately address, could cause system interruptions, reputational harm, loss of intellectual property, delays in our product development, lengthy interruptions in our services, breaches of data security and foreign tax jurisdictions. Aloss of critical data. Any of these events could prevent us from fulfilling our customers’ orders or could negatively impact a country or region in which we sell our products, which could in turn decrease that country’s or region’s demand for our products. Our corporate headquarters, a significant portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. In addition to providing for U.S. income taxes on earnings from the United States, we provide for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the United States. While we do not anticipate changing our intention regarding permanently reinvested earnings, if certain foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings.
Our income tax expense has differed from the tax computed at the U.S. federal statutory income tax rate due primarily to discrete items and to earnings considered as permanently reinvested in foreign operations. Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in the tax rates
in jurisdictions where our income is earned, by changes in, or our interpretation of, tax rules and regulations in the jurisdictions in which we do business, by unanticipated decreases in the amount of earnings in countries with low statutory tax rates, by lapses of the availability of the U.S. research and development tax credit, or by changesactivities, certain of our data centers and certain other critical business operations are located in the valuation of our deferred tax assetsSan Francisco Bay Area, and liabilities. The United States, countriesadditional facilities where we conduct significant operations are located in the European Union and other countries where we do business have been considering changesSalt Lake Valley Area, both of which are near major earthquake faults. A catastrophic event that results in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to corporate multinationals such as Adobe. These potential changes could adversely affect our effective tax ratesthe destruction or result in other costs to us.
In addition, we are subject to the continual examination of our income tax returns by the U.S. Internal Revenue Service (“IRS”) and other domestic and foreign tax authorities, including a current examination by the IRS of our fiscal 2010, 2011 and 2012 tax returns. 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 potential adjustments that may result from the current examinations. There can be no assurance that the final determinationdisruption of any of these examinations will not have an adverse effect on our operating results and financial position.
If we are unable to recruit and retain key personneldata centers or our critical business may be harmed.
Much of our future success depends on the continued service and availability of our senior management. These individuals have acquired specialized knowledge and skills with respect to Adobe. The loss of any of these individuals could harm our business, especially in the event that we have not been successful in developing adequate succession plans. Our business is also dependent on our ability to retain, hire and motivate talented, highly skilled personnel across all levels of our organization. Experienced personnel in theor information technology industry are in high demand and competition for their talents is intense in many areas where our employees are located. If we are unable to continue to successfully attract and retain key personnel, our business may be harmed. Effective succession planning is also a key factor for our long-term success. Our failure to enable the effective transfer of knowledge and facilitate smooth transitions of our key employeessystems could adversely affect our long-term strategic planning and execution.
We believe that a critical contributor to our success to date has been our corporate culture, which we have built to foster innovation, teamwork and employee satisfaction. As we grow, including from the integration of employees and businesses acquired in connection with previous or future acquisitions, we may find it difficult to maintain important aspects of our corporate culture, which could negativelyseverely affect our ability to retainconduct normal business operations and, recruit personnel whoas a result, our future operating results could be adversely affected.
Climate change may have a long-term impact on our business.
While we seek to partner with organizations that mitigate their business risks associated with climate change, we recognize that there are essentialinherent risks wherever business is conducted. Access to clean water and reliable energy in the communities where we conduct our business, whether for our offices or for our vendors, is a priority. Our major sites in California, Utah and India are vulnerable to prolonged droughts due to climate change. In the event of a natural disaster that disrupts business due to limited access to these resources, we have the potential to experience losses to our future success.business, and added costs to resume operations.
Our investment portfolio may become impaired by deterioration of the capitalfinancial markets.
Our cash equivalent and short-term investment portfolio as of November 28, 2014December 1, 2017 consisted of corporate bonds and commercial paper, U.S. agencyforeign government securities and U.S. Treasury securities, money market mutual funds, municipal securities, time deposits and foreign governmentasset-backed securities. We follow an established investment policy and set of guidelines to monitor and help mitigate our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes.
Should financial market conditions worsen in the future, investments in some financial instruments may pose risks arising from market liquidity and credit concerns. In addition, any deterioration of the capital markets could cause our other income and expense to vary from expectations. As of November 28, 2014,December 1, 2017, we had no material impairment charges associated with our short-term investment portfolio, and although we believe our current investment portfolio has little risk of material impairment, we cannot predict future market conditions, or market liquidity or credit availability, and can provide no assurance that our investment portfolio will remain materially unimpaired.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We own and occupy three office buildings and land in San Jose, California where our corporate headquarters is located. We also own buildings and land in Lehi, Utah, and at 601 and 625 Townsend Street in San Francisco, California, and the data center in Hillsboro, Oregon. Outside of the United States, we own certain land and buildings we occupy in Bangalore, India and Noida, India. We lease or sublease the rest of the properties we occupy under operating leases. Such leases expire at various times through 2031, with the exception of our land lease in Noida, India that expires in 2091.
The following table sets forth the location, approximate square footage and use of each of the principal properties used by Adobe during fiscal 20142017. We lease or sublease all of these properties with the exception of our property in Noida, India where we own the building and lease the land, in Lehi where we own the building and land, in San Francisco at 601 and 625 Townsend Street where we own the building and land, and our corporate offices in San Jose where we own the land and the East and West tower buildings after exercising our option to purchase these buildings in August 2014, and lease the Almaden Tower building. All leased properties are leased under operating leases. Such leases expire at various times through 2028, with the exception of our land lease in Noida, India that expires in 2091. The annual base rent expense (including operating expenses, property taxes and assessments, as applicable) for all leased facilities is currently approximately $93.3 million and is subject to annual adjustments as well as changes in interest rates.
|
| | | | | | |
| Location | | Approximate
Square
Footage | | | Use |
| North America: | | | | | |
West Tower, 345 Park Avenue
San Jose, CA 95110, USA | | 378,000391,000 |
| | | Research, product development, sales, marketing and administration |
East Tower, 321 Park Avenue
San Jose, CA 95110, USA | | 321,000325,000 |
| | | Research, product development, sales, marketing and administration |
Almaden Tower, 151 Almaden Boulevard
San Jose, CA 95110, USA | | 267,000273,000 |
| | | ProductResearch, product development, sales, marketing and administration |
601 and 625 Townsend Street
San Francisco, CA 94103, USA | | 346,000 |
| | Research, product development, sales, marketing and administration |
(1)410 Townsend Street
San Francisco, CA 94107, USA | | 47,000 |
| | Research, product development, sales, marketing and administration |
3900 Adobe Way
Lehi, UT 84043, USA | | 257,000 |
| | Research, product development, sales, marketing and administration |
801 N. 34th Street-Waterfront
Seattle, WA 98103, USA | | 182,000161,000 |
| (2)
| | Product development, sales, technical support and administration |
410 Townsend Street
San Francisco, CA 94107, USA
| | 47,000 |
| | | Research, product development, sales, marketing and administration |
3900 Adobe Way
Lehi, UT 84043, USA | | 281,000 |
| (3)
| | Research, product development, sales, marketing and administration |
7930 Jones Branch Drive
McLean, VA 22102, USA | | 34,000 |
| (4)
| | Sales and marketing |
1540 Broadway
New York, NY 10036, USA | | 37,00055,000 |
| | | Sales, marketing and marketingadministration |
343 Preston Street
Ottawa, Ontario K1S 5N4, Canada | | 122,000 |
| (5)(1)
| | Research, product development, sales, marketing and administration |
25100 NW Evergreen Rd Hillsboro, OR 97124, USA | | 85,000 |
| | | Data center |
| India: | | | | | |
Adobe Towers, 1-1A, Sector 25A
Noida, U.P. | | 191,000 |
| | | Product development and administration |
Tech Boulevard, Plot #6,No. 05, Block A, Sector 127132
Expressway, Noida, U.P.
| | 107,000363,000 |
| | | Product development and administration |
Salapuria Infinity, Ground Floor,Prestige Platina Technology Park
1st Floor, 3rd Floor
#5 and #6 Bannerghatta Road,Building 1, Block A
Bangalore | | 185,000250,000 |
| | | Research, product development, sales and administration |
Prestige Trinity Centre Bhoganahalli Village, Varthur Hobli Bangalore | | 149,000 |
| | Research, product development, sales and administration |
| Japan: | | | | | |
Gate City Osaki East Tower
1-11 Osaki
Shinagawa-ku, Tokyo | | 56,000 |
| | | Product development, sales, marketing and marketing |
China: | | | | | |
Block A, SP Tower, 11th, 19th,
21st & 22nd Floors
Block B, SP Tower, 19th Floor
Block D, SP Tower, 10th Floor
Tsinghua Science Park, Yard 1
Zhongguancun Donglu, Haidian District
Beijing
| | 94,000 |
| (6)
| | Research and product development |
|
| | | | | | |
Location | | Approximate
Square
Footage | | | Useadministration |
| Romania: | | | | | |
26 Z Timisoara Blvd, Anchor Plaza
Lujerului, Sector 6
Bucharest | | 71,000 |
| | | Research and product development |
| UK: | | | | | |
Market House Providence Place Maidenhead, Berkshire, SL6 8AD | | 49,000 |
| | | Product development, sales, marketing and administration
|
Germany: | | | | | |
Grosse Elbstrasse 27 |
Hamburg | 36,000 |
| | | Research and product development | France: | | | | | |
18 rue Roger Simon-Barboux
Arcueil, France
| | 28,000 |
| | | Product development, sales and administration |
191 Avenue Aristide Briand
Cachan, France
| | 11,000 |
| | | Research and product development |
| |
(1)
| The total square footage is 346,000, of which we occupy 272,000 square feet, or approximately 79% of this facility; 74,000 square feet is unoccupied basement space. |
| |
(2)
| The total square footage is 182,000, of which we occupy 162,000 square feet, or approximately 89% of this facility. The remaining square footage is subleased. |
| |
(3)
| The total square footage is 281,000, of which we occupy 257,000 square feet, or approximately 91% of this facility; 24,000 square feet is unoccupied basement space. |
| |
(4)
| The total square footage is 34,000, of which we occupy 30,000 square feet, or approximately 88% of this facility. The remaining square footage is subleased. |
| |
(5)(1)
| The total square footage is 122,000, of which we occupy 59,000 square feet, or approximately 48% of this facility; 6,000 square feet is unoccupied. The remaining square footage is subleased. |
| |
| In fiscal 2014, we initiated our Fiscal 2014 Restructuring Plan which included a plan to vacate our research and product development facility in China during fiscal 2015. See Note 10 of our Notes to Consolidated Financial Statements for further information regarding our restructuring plans.
|
In general, all facilities are in good condition, suitable for the conduct of our business and are operating at an average capacity of approximately 82%83%.
ITEM 3. LEGAL PROCEEDINGS
In connection with disputes relating to the validity or alleged infringement of third-party intellectual property rights, including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation may be very costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully defended or resolved many past litigation and disputes, we may not prevail in any ongoing or future litigation.litigation and disputes. Third-party intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from licensing certain of our products or offering certain of our services, subject us to injunctions restricting our sale of products or services, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers including contractual provisions under various license arrangements and service agreements.
Between May 4, 2011 and July 14, 2011, five putative class action lawsuits were filed in Santa Clara Superior Court and Alameda Superior Court in California. On September 12, 2011, the cases were consolidated into In Re High-Tech Employee Antitrust Litigation (“HTEAL”) pending in the United States District Court for the Northern District of California, San Jose
Division. In the consolidated complaint, Plaintiffs alleged that Adobe, along with Apple, Google, Intel, Intuit, Lucasfilm and Pixar, agreed not to recruit each other’s employees in violation of Federal and state antitrust laws. Plaintiffs claim the alleged agreements suppressed employee compensation and deprived employees of career opportunities. Plaintiffs seek injunctive relief, monetary damages, treble damages, costs and attorneys fees. All defendants deny the allegations and that they engaged in any wrongdoing of any kind. On October 24, 2013, the court certified a class of all persons who worked in the technical, creative, and/or research and development fields on a salaried basis in the United States for one or more of the following: (a) Apple from March 2005 through December 2009; (b) Adobe from May 2005 through December 2009; (c) Google from March 2005 through December 2009; (d) Intel from March 2005 through December 2009; (e) Intuit from June 2007 through December 2009; (f) Lucasfilm from January 2005 through December 2009; or (g) Pixar from January 2005 through December 2009, excluding retail employees, corporate officers, members of the boards of directors, and senior executives of all defendants. During the second quarter of fiscal 2014, the parties reached a settlement to resolve this lawsuit, subject to the Court’s approval. On August 8, 2014, the Court rejected the settlement agreement jointly submitted by the parties. During the first quarter of fiscal 2015, the parties reached another agreement to settle the litigation. On January 15, 2015, the agreement was submitted to the Court seeking preliminary approval of the settlement. The hearing for preliminary approval is set for March 2015. We accrued a loss contingency of $10.0 million associated with this matter during the first quarter of fiscal 2014.
In addition to intellectual property disputes, and the other litigation matter described above, we are subject to legal proceedings, claims and investigations in the ordinary course of business, including claims relating to commercial, employment and other matters. Some of these disputes and legal proceedings may include speculative claims for substantial or indeterminate amounts of damages. We consider all claims on a quarterly basis in accordance with GAAP and, based on known facts, assess whether potential losses are considered reasonably possible, probable and estimable. Based upon this assessment, we then evaluate disclosure requirements and whether to accrue for such claims in our financial statements. This determination is then reviewed and discussed with ourthe Audit Committee of the Board of Directors and our independent registered public accounting firm.
We make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Unless otherwise specifically disclosed here or in our Notes to Consolidated Financial Statements and notes thereto, we have determined that no provision for liability nor disclosure is required related to any claim against us because: (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.
All legal costs associated with litigation are expensed as incurred. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us. It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.
In connection with our anti-piracypiracy conversion efforts, conducted both internally and through organizations such as the Business Software Alliance, from time to time we undertake litigation against alleged copyright infringers. Such lawsuits may lead to counter-claims alleging improper use of litigation or violation of other laws. We believe we have valid defenses with respect to such counter-claims; however, it is possible that our consolidated financial position, cash flows or results of operations could be negatively affected in any particular period by the resolution of one or more of these counter-claims.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
Our common stock is traded on the NASDAQ Global Select Market under the symbol “ADBE.” The following table sets forth the high and low sales price per share of our common stock for the periods indicated.
| | | | | Price Range | | Price Range |
| | | High | | Low | | High | | Low |
| Fiscal 2014: | | | | | |
| Fiscal 2017: | | | | | |
| First Quarter | | $ | 69.92 |
| | $ | 53.99 |
| | $ | 120.35 |
| | $ | 101.55 |
|
| Second Quarter | | $ | 68.92 |
| | $ | 58.63 |
| | $ | 143.48 |
| | $ | 119.60 |
|
| Third Quarter | | $ | 73.57 |
| | $ | 64.09 |
| | $ | 155.16 |
| | $ | 137.25 |
|
| Fourth Quarter | | $ | 73.68 |
| | $ | 60.88 |
| | $ | 185.40 |
| | $ | 144.57 |
|
| Fiscal Year | | $ | 73.68 |
| | $ | 53.99 |
| | $ | 185.40 |
| | $ | 101.55 |
|
| Fiscal 2013: | | |
| | |
| |
| Fiscal 2016: | | | |
| | |
|
| First Quarter | | $ | 39.83 |
| | $ | 34.70 |
| | $ | 95.56 |
| | $ | 73.85 |
|
| Second Quarter | | $ | 47.01 |
| | $ | 40.46 |
| | $ | 100.17 |
| | $ | 84.35 |
|
| Third Quarter | | $ | 48.39 |
| | $ | 42.72 |
| | $ | 103.57 |
| | $ | 90.85 |
|
| Fourth Quarter | | $ | 57.55 |
| | $ | 45.88 |
| | $ | 110.81 |
| | $ | 98.77 |
|
| Fiscal Year | | $ | 57.55 |
| | $ | 34.70 |
| | $ | 110.81 |
| | $ | 73.85 |
|
Stockholders
According to the records of our transfer agent, there were 1,2941,091 holders of record of our common stock on January 16, 201512, 2018. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividends
We did not declare or pay any cash dividends on our common stock during fiscal 20142017 or fiscal 20132016. Under the terms of our credit agreement and lease agreements, we are not prohibited from paying cash dividends unless payment would trigger an event of default or one currently exists. We do not anticipate paying any cash dividends in the foreseeable future.
Issuer Purchases of Equity Securities
| | Period | | Total Number of Shares Repurchased | | Average Price Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Approximate Dollar Value that May Yet be Purchased Under the Plan(1) | | | Total Number of Shares Repurchased | | Average Price Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans | | Approximate Dollar Value that May Yet be Purchased Under the Plan(1) | |
| | | (in thousands, except average price per share) | | | (in thousands, except average price per share) | |
| Beginning repurchase authority | Beginning repurchase authority | | | | | | | 367,324 |
| | Beginning repurchase authority | | | | | | | $ | 2,298,777 |
| |
| August 30—September 26, 2014 | | | | | | | | | |
| September 2 — September 29, 2017 | | September 2 — September 29, 2017 | | | | | | | | |
| Shares repurchased | Shares repurchased | 596 |
| | $ | 71.08 |
| | 596 |
| | $ | (42,324 | ) | | Shares repurchased | 642 |
| | $ | 154.03 |
| | 642 |
| | $ | (98,777 | ) | |
| September 27—October 24, 2014 | | | | | | | | | |
| September 30 — October 27, 2017 | | September 30 — October 27, 2017 | | | | | | | | |
| Shares repurchased | Shares repurchased | 643 |
| | $ | 65.86 |
| | 643 |
| | $ | (42,373 | ) | (2) | Shares repurchased | 662 |
| | $ | 151.04 |
| | 662 |
| | $ | (100,000 | ) | (2) |
| October 25—November 28, 2014 | |
| | |
| | |
| | |
| | |
| October 28 — December 1, 2017 | | October 28 — December 1, 2017 | |
| | |
| | |
| | |
| |
| Shares repurchased | Shares repurchased | 611 |
| | $ | 69.24 |
| | 611 |
| | $ | (42,318 | ) | (2) | Shares repurchased | 552 |
| | $ | 178.36 |
| | 552 |
| | $ | (98,500 | ) | (2) |
| Total | Total | 1,850 |
| | |
| | 1,850 |
| | $ | 240,309 |
| | Total | 1,856 |
| | |
| | 1,856 |
| | $ | 2,001,500 |
| |
_________________________________________
| |
(1) | We currently have authority granted by ourIn January 2017, the Board of Directors granted authority to repurchase up to $2.0$2.5 billion in common stock.
stock through the end of fiscal 2019. |
| |
(2) | In September 2014, as part of our stock repurchase program,2017, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $125.0$300 million. As of November 28, 2014,December 1, 2017, approximately $40.3$101.5 million of the prepayment remained under this agreement. |
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data (presented in thousands, except per share amounts and employee data) is derived from our Consolidated Financial Statements. As our historical operating results are not necessarily indicative of future operating results, this data should be read in conjunction with the Consolidated Financial Statements and notes thereto, and with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
| | | | Fiscal Years | Fiscal Years |
| | 2014 | | 2013 | | 2012 | | 2011 | | 2010 | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Operations: | | | | | | | | | | | | | | | | | | |
| Revenue | $ | 4,147,065 |
| | $ | 4,055,240 |
| | $ | 4,403,677 |
| | $ | 4,216,258 |
| | $ | 3,800,000 |
| $ | 7,301,505 |
| | $ | 5,854,430 |
| | $ | 4,795,511 |
| | $ | 4,147,065 |
| | $ | 4,055,240 |
|
| Gross profit | $ | 3,524,985 |
| | $ | 3,468,683 |
| | $ | 3,919,895 |
| | $ | 3,778,385 |
| | $ | 3,396,498 |
| $ | 6,291,014 |
| | $ | 5,034,522 |
| | $ | 4,051,194 |
| | $ | 3,524,985 |
| | $ | 3,468,683 |
|
| Income before income taxes | $ | 361,376 |
| | $ | 356,141 |
| | $ | 1,118,794 |
| | $ | 1,035,230 |
| | $ | 943,151 |
| $ | 2,137,641 |
| | $ | 1,435,138 |
| | $ | 873,781 |
| | $ | 361,376 |
| | $ | 356,141 |
|
| Net income | $ | 268,395 |
| | $ | 289,985 |
| | $ | 832,775 |
| | $ | 832,847 |
| | $ | 774,680 |
| $ | 1,693,954 |
| | $ | 1,168,782 |
| | $ | 629,551 |
| | $ | 268,395 |
| | $ | 289,985 |
|
| Net income per share: | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| Basic | $ | 0.54 |
| | $ | 0.58 |
| | $ | 1.68 |
| | $ | 1.67 |
| | $ | 1.49 |
| $ | 3.43 |
| | $ | 2.35 |
| | $ | 1.26 |
| | $ | 0.54 |
| | $ | 0.58 |
|
| Diluted | $ | 0.53 |
| | $ | 0.56 |
| | $ | 1.66 |
| | $ | 1.65 |
| | $ | 1.47 |
| $ | 3.38 |
| | $ | 2.32 |
| | $ | 1.24 |
| | $ | 0.53 |
| | $ | 0.56 |
|
| Shares used to compute basic net income per share | 497,867 |
| | 501,372 |
| | 494,731 |
| | 497,469 |
| | 519,045 |
| 493,632 |
| | 498,345 |
| | 498,764 |
| | 497,867 |
| | 501,372 |
|
| Shares used to compute diluted net income per share | 508,480 |
| | 513,476 |
| | 502,721 |
| | 503,921 |
| | 525,824 |
| 501,123 |
| | 504,299 |
| | 507,164 |
| | 508,480 |
| | 513,476 |
|
| Cash dividends declared per common share | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Financial position:(1) | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| | |
|
| Cash, cash equivalents and short-term investments | $ | 3,739,491 |
| | $ | 3,173,752 |
| | $ | 3,538,353 |
| | $ | 2,911,692 |
| | $ | 2,468,015 |
| $ | 5,819,774 |
| | $ | 4,761,300 |
| | $ | 3,988,084 |
| | $ | 3,739,491 |
| | $ | 3,173,752 |
|
Working capital | $ | 2,107,893 |
| | $ | 2,520,281 |
| | $ | 3,125,314 |
| | $ | 2,520,672 |
| | $ | 2,147,962 |
| $ | 3,720,356 |
| | $ | 3,028,139 |
| | $ | 2,608,336 |
| | $ | 2,107,893 |
| | $ | 2,520,281 |
|
| Total assets | $ | 10,785,829 |
| | $ | 10,380,298 |
| | $ | 10,040,229 |
| | $ | 8,991,183 |
| | $ | 8,141,148 |
| $ | 14,535,556 |
| | $ | 12,697,246 |
| | $ | 11,714,500 |
| | $ | 10,781,991 |
| | $ | 10,374,940 |
|
| Debt and capital lease obligations, non-current | $ | 911,086 |
| | $ | 1,499,297 |
| | $ | 1,496,938 |
| | $ | 1,505,096 |
| | $ | 1,513,662 |
| $ | 1,881,421 |
| | $ | 1,892,200 |
| | $ | 1,895,259 |
| | $ | 907,248 |
| | $ | 1,493,939 |
|
| Stockholders’ equity | $ | 6,775,905 |
| | $ | 6,724,634 |
| | $ | 6,665,182 |
| | $ | 5,783,113 |
| | $ | 5,192,387 |
| $ | 8,459,869 |
| | $ | 7,424,835 |
| | $ | 7,001,580 |
| | $ | 6,775,905 |
| | $ | 6,724,634 |
|
| Additional data: | | | |
| | |
| | |
| | |
| | | |
| | |
| | |
| | |
|
| Worldwide employees | 12,499 |
| | 11,847 |
| | 11,144 |
| | 9,925 |
| | 9,117 |
| 17,973 |
| | 15,706 |
| | 13,893 |
| | 12,499 |
| | 11,847 |
|
_________________________________________
| |
(1) | Information associated with our financial position is as of the Friday closest to November 30 for the five fiscal periods through 20142017. |
| |
(2) | For fiscal 2014 and prior, our working capital did not include the effects of the adoption of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which required all deferred tax assets and liabilities and any related valuation allowance to be classified as non-current on our Consolidated Balance Sheets. The new standard was adopted prospectively starting fiscal 2015. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto.
ACQUISITIONS
During fiscal 2014,2017, we completed our acquisition of TubeMogul, a publicly held video advertising platform company, for $560.8 million. As of the end of fiscal 2017, we are continuing to integrate TubeMogul into our Digital Marketing reportable segment.
During fiscal 2015, we completed our acquisition of privately held Fotolia, a leading marketplace for royalty-free photos, images, graphics and HD videos, for $807.5 million. During fiscal 2015, we integrated Fotolia into our Digital Media reportable segment.
We also completed other immaterial business acquisition which wasacquisitions during the fiscal years presented. Pro forma information has not materialbeen presented for any of our fiscal 2017, 2016 and 2015 acquisitions as the impact to our Consolidated Financial Statements.
During fiscal 2013, we completed our acquisitions of privately held Neolane, a leader in cross-channel campaign management technology for $616.7 million and privately held Behance, an online social media platform to showcase and discover creative work for $111.1 million. During fiscal 2013, we integrated Neolane and Behance into our Digital Marketing and Digital Media reportable segments, respectively. The impact of these acquisitionsStatements was not material to our Consolidated Financial Statements.material.
During fiscal 2012, we completed the acquisition of privately held Efficient Frontier, a multi-channel digital ad buying and optimization company for $374.7 million. During fiscal 2012, we began integrating Efficient Frontier into our Digital Marketing segment.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our Consolidated Financial Statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. 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, goodwill impairment 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, so 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 revenue is derived from the subscription, non-software related hosted services, perpetual and term-based licensing of perpetual, time-based and subscription software products, associated software maintenance and support plans, non-software related hosted services, consulting services, training and technical support. Most of our enterprise customer arrangements are complex, involving multiple solutions and various license rights, bundled with post-contract customer support and other meaningful rights that together provide a complete end-to-end solution to the customer. Throughout the contract period, customers use our solutions to complete various phases of the creative and/or marketing processes allowing them to concurrently work on multiple projects. In response to evolving customer and market expectations, we frequently expand and improve our technology to keep up with the pace of change, to provide enhancements to our tools to meet industry needs and to provide support at each stage of the customer’s life cycle.
We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists,exists; we have delivered the product or performed the service,service; the fee is fixed or determinabledeterminable; and collection is probable. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.
We enter into multiple element revenue arrangements in which a customer may purchase a combination of software, upgrades, maintenance and support, hosted services and consulting.
For our software and software-related multiple element arrangements, we must: (1) determine whether and when each element has been delivered; (2) determine whether undelivered products or services are essential to the functionality of the delivered products and services; (3) determine the fair value of each undelivered element using vendor-specific objective evidence (“VSOE”),; and (4) allocate the total price among the various elements. VSOE of fair value is used to allocate a portion of the price to the undelivered elements and the residual method is used to allocate the remaining portion to the delivered elements. Absent VSOE, revenue is deferred until the earlier of the point at which VSOE of fair value exists for any undelivered element or until all elements of the arrangement have been delivered. However, if the only undelivered element is maintenance and support, the entire
arrangement fee is recognized ratably over the performance period. Changes in assumptions or judgments or changes to the elements in a software arrangement could cause a material increase or decrease in the amount of revenue that we report in a particular period.
We determine VSOE for each element based on historical stand-alone sales to third parties or from the stated renewal rate for the elements contained in the initial arrangement. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range.
We have established VSOE for our software maintenance and support services, custom software development services, consulting services and training, when such services are sold optionally with software licenses.
For multiple-element arrangements containing our non-software services, we must: (1) determine whether and when each element has been delivered; (2) determine the fair value of each element using the selling price hierarchy of VSOE of selling price, third-party evidence (“TPE”) of selling price or best-estimated selling price (“BESP”), as applicable; and (3) allocate the total price among the various elements based on the relative selling price method.
For multiple-element arrangements that contain both software and non-software elements, we allocate revenue to software or software-related elements as a group and any non-software elements separately based on the selling price hierarchy. We determine the selling price for each deliverable using VSOE of selling price, if it exists, or TPE of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use BESP. Once revenue is allocated to software or software-related elements as a group, we recognize revenue in conformance with software revenue accounting guidance. Revenue is recognized when revenue recognition criteria are met for each element.
We are generally unable to establish VSOE or TPE for non-software elements and as such, we use BESP. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. We determine BESP for a product or service by considering multiple factors including, but not limited to, major product groupings, geographies, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. Pricing practices taken into consideration include historic contractually stated prices, volume discounts where applicable and our price lists. We must estimate certain royalty revenue amounts due to the timing of securing information from our customers. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, our assumptions and judgments regarding future products and services as well as our estimates of royalty revenue could differ from actual events, thus materially impacting our financial position and results of operations.
Product revenue is recognized when the above criteria are met. We reduce the revenue recognized for estimated future returns, rebates and price protection and rebates at the time the related revenue is recorded. In determining our estimate for returns and in accordance with our internal policy regarding global channel inventory which is used to determine the level of product held by our distributors on which we have recognized revenue, we rely upon historical data, the estimated amount of product inventory in our distribution channel, the rate at which our product sells through to the end user, product plans and other factors. Our estimated provisions for returns can vary from what actually occurs. Product returns may be more or less than what was estimated. The amount of inventory in the channel could be different than what is estimated. Our estimate of the rate of sell-through for product in the channel could be different than what actually occurs. There could be a delay in the release of our products. These factors and unanticipated changes in the economic and industry environment could make our return estimates differ from actual returns, thus impacting our financial position and results of operations.
In the future, actual returns and price protection may exceed our estimates as unsold products in the distribution channels are exposed to rapid changes in consumer preferences, market conditions or technological obsolescence due to new platforms, product updates or competing products. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, if our estimates change, our returns and price protection reserves would change, which would impact the total net revenue we report.
We recognize revenuesrevenue for hosted services that are priced based on a committed number of transactions ratably beginning on the date the services associated with the committed transactions are first made available to the customer commences use of our services and continuing through the end of the customercontractual service term. Over-usage fees, and fees billed based on the actual number of transactions from which we capture data, are billed in accordance with contract terms as these fees are incurred. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Our consulting revenue is recognized on a time and materials basis and is measured monthly based on input measures, such as on hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones, when applicable.
Business Combinations
We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed, assumed equity awards, as well as to in-process research and development based upon their estimated fair values at the acquisition
date. The purchase price allocation process requires management to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets, deferred revenue obligations and equity assumed.
Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the 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;
expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed;
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; 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 the support 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. The estimated costs to fulfill the obligations are based on the historical costs related to fulfilling the obligations.
In connection with the purchase price allocations for our acquisitions, we estimate the fair value of the equity awards assumed. The estimated fair value is determined utilizing a modified binomial option pricing model which assumes employees exercise their stock options when the share price exceeds the strike price by a certain dollar threshold. If the acquired company has significant historical data on their employee’s exercise behavior, then this threshold is determined based upon the acquired company’s history. Otherwise, our historical exercise experience is used to determine the exercise threshold. Zero coupon yields implied by U.S. Treasury issuances, implied volatility for our common stock and our historical forfeiture rate are other inputs to the binomial model.
Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
Goodwill Impairment
We complete our goodwill impairment test on an annual basis, during the second quarter of our fiscal year, or more frequently, if changes in facts and circumstances indicate that an impairment in the value of goodwill recorded on our balance sheet may exist. In order to estimate the fair value of goodwill, we typically estimate future revenue, consider market factors and estimate our future cash flows. Based on these key assumptions, judgments and estimates, we determine whether we need to record an impairment charge to reduce the value of the asset carried on our balance sheet to its estimated fair value. Assumptions, judgments and estimates about future values are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy or our internal forecasts. Although we believe the assumptions, judgments and estimates we have made in the past have been reasonable and appropriate, different assumptions, judgments and estimates could materially affect our reported financial results.
We completed our annual impairment test in the second quarter of fiscal 2014 and determined there was no impairment. The results of our annual impairment test indicate there is no significant risk of future material goodwill impairment in any of our reporting units.
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 and any valuation allowance to be recorded against a deferred tax asset.
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 the IRSU.S. Internal Revenue Service (“IRS”) and other domestic and foreign tax authorities, including a current examination by the IRS of our fiscal 2010, 2011 and 2012 tax returns.authorities. We expect future examinations 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 potential adjustments that may result from the currentsuch examinations. We believe such estimates to be reasonable; however, the final determination of any of these examinations could significantly impact the amounts provided for income taxes in our Consolidated Financial Statements.
Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.
We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. In addition to providing for U.S. income taxes on earnings from the U.S.,United States, we provide for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the U.S.United States. While we do not anticipate changing our intention regarding permanently reinvested earnings as of the balance sheet date, if certain foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings.
Our income tax expense has differed from the tax computed at the U.S. federal statutory income tax rate due primarily to discrete items and to earnings considered as permanently reinvested in foreign operations. Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in the tax rates in jurisdictions where our income is earned, by changes in or our interpretation of tax rules and regulations in the jurisdictions in which we do business, by unanticipated decreases in the amount of earnings in countries with low statutory tax rates, by lapses of the availability of the U.S. researchunexpected negative changes in business and developmentmarket conditions that could reduce certain tax credit,benefits, or by changes in the valuation of our deferred tax assets and liabilities. The
In addition, in the United States, the European Commission, countries in the European Union and other countries where we do business, have been consideringwe 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 potentialcountries and other governmental bodies have or could make unprecedented assertions about how earnings in their jurisdictions might be determined that are contrary to the way in which we have interpreted and historically applied the rules and regulations described above in our income tax returns filed 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.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.
Recent Accounting Pronouncements Not Yet Effective
With the exception of the new revenue standard discussed above, there have been no newinformation regarding recent accounting pronouncements not yet effective that haveare of significance, or potential significance to our Consolidated Financial Statements.us.
RESULTS OF OPERATIONS
Overview of 20142017
For fiscal 2014,2017, 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 Marketing, 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 for creating and publishing content and applications. Creative Cloud first delivered in May 2012, is our next-generation offering that supersedes our historical model of licensing our creative products with perpetual licenses. Creative Cloud delivers value through more frequent product updates, storage and access to user files stored in the cloud with syncing of files across users’ machines, access to marketplace, social and community-based features with our Adobe Stock and services through our acquisition of Behance in December 2012,services, app creation capabilities and lower entry pointaffordable pricing for cost-sensitive customers.
We offer Creative Cloud for individuals, and forstudents, teams and we enable larger enterprise customers to acquireenterprises. We expect Creative Cloud capabilities through Enterprise Term License Agreements (“ETLAs”). The three Creative Cloud offerings address the multiple
routes to market we use to license our creative software to targeted customers. Adoption of Creative Cloud has transformed our business model and we continue to expect this towill drive highersustained long-term revenue growth through ana continued expansion of our customer base by acquiring new users through a loweron account of Creative Cloud’s low cost of entry and delivery of additional features and value, as well as keeping existing customers current on our latest release. This model drivesWe 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 to bewith users, attract more new customers, and grow a recurring and predictable as revenue stream that is recognized ratably.
We continue to implement strategies that will accelerate awareness, consideration and purchase of subscriptions to our Creative Cloud offering.offerings. These strategies include increasing the value Creative Cloud users receive, such as offering new 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. Additionally, in May 2013 we announced we would exclusively deliver new creative product innovations and features to Creative Cloud subscribers, and that Adobe Creative Suite 6 (“CS6”), which was released in May 2012, would be the last major update we provide for perpetual licensees. In the first half of fiscal 2014, we announced the removal of general availability of CS6 on a perpetual licensing basis from legacy shrinkwrap and volume licensing channels. We still offer CS6 through our Adobe.com website and in certain markets.
Because of the shift towards Creative Cloud subscriptions and ETLAs, perpetual revenue for CS6 has declined, and by the fourth quarter of fiscal 2014Enterprise Term License Agreements (“ETLAs”), revenue from perpetual licensing of our creative professionalCreative products was immaterial.has been immaterial to our business.
During fiscal 2014,
We are also a market leader with our Adobe Document Cloud offerings built around our Adobe Acrobat family of products, the Adobe Reader and a set of integrated cloud-based document services, including Adobe Sign. Acrobat provides reliable creation and exchange of electronic documents, regardless of platform or application source type. Document Cloud, which we continuedbelieve 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 experience strong adoption ofcreate, review, approve, sign and track documents whether on a desktop or mobile device. Adobe Acrobat DC, with a touch-enabled user interface, is offered both through subscription and perpetual licenses.
Annualized Recurring Revenue (“ARR”) is currently the key performance metric our Creative Cloud subscription offerings which has caused our Creative Cloud subscription revenue to increase as compared to the year-ago period.
To assist with an understanding of this transition, we are using certain performance metricsmanagement uses to assess the health and trajectory of our overall Digital Media segment. These metrics include the total number of current paid subscriptions and Annualized Recurring Revenue (“ARR”). ARR should be viewed independently of revenue, deferred revenue and unbilled deferred revenue as ARR is a performance metric and is not intended to be combined with any of these items. We plan to adjust our reported ARR on an annual basis to reflect any material exchange rates changes.
For our Creative business, we define Creative ARR as the sum of:
the number of current subscriptions, multiplied by the average subscription price paid per user per month, multiplied by twelve months; plus,
twelve months of contract value of ETLAs where the revenue is ratably recognized over the life of the contract; plus
twelve months of Adobe Digital Publishing Suite contract value where the revenue is ratably recognized.
We exited fiscal 2014 with 3.454 million paid Creative Cloud subscriptions, up 140% from 1.439 million at the end of fiscal 2013. Total Creative ARR exiting fiscal 2014 was $1.68 billion, up from $801 million at the end of fiscal 2013.
Our Digital Media segment also includes our Document Services products and solutions, including Acrobat, Acrobat cloud services and EchoSign e-signing solution. In fiscal 2014 we continued to drive solid adoption of our Acrobat family of products primarily through license agreements with enterprise customers. We also drove strong adoption of subscription-based services including our Acrobat cloud services. Combined, adoption of Acrobat through ETLAs and our Document Services subscription offerings helped grow Document Services ARR to $271 million exiting fiscal 2014, up from $143 million at the end of fiscal 2013.
Total Digital Media ARR, which we define as the sum of Creative ARR and Document Services ARR, grew to $1.95 billion at the end of fiscal 2014, up from $944 million at the end of fiscal 2013, demonstrating the progress we have made with the transformation of our business to a more recurring, ratable and predictable revenue model. Our reported ARR results in fiscal 20142017 are based on currency rates set at the start of the fiscal year2017 and held constant throughout the year. We calculate ARR as follows:
|
| | |
| Creative ARR | Annual Value of Creative Cloud Subscriptions and Services + Annual Digital Publishing Suite Contract Value + Annual Creative ETLA Contract Value |
| Document Cloud ARR |
Annual Value of Document Cloud Subscriptions and Services + Annual Document Cloud ETLA Contract Value
|
| Digital Media ARR | Creative ARR + Document Cloud ARR |
Creative ARR exiting fiscal 2017 was $4.63 billion, up from $3.52 billion at the end of fiscal 2016. Document Cloud ARR exiting fiscal 2017 was $600 million, up from $472 million at the end of fiscal 2016. Total Digital Media ARR grew to $5.23 billion at the end of fiscal 2017, up from $3.99 billion at the end of fiscal 2016. Revaluing our ending ARR for fiscal 20142017 using currency rates at the beginning of fiscal 2015,2018, our Digital Media ARR at the end of fiscal 20142017 would be $1.88$5.39 billion or approximately $72$154 million lowerhigher than the ARR reported above.
Our success in driving growth in ARR has positively affected our revenue growth. Creative revenue in fiscal 2017 was $4.17 billion, up from $3.18 billion in fiscal 2016 and representing 31% year-over-year growth. Document Cloud revenue in fiscal 2017 was $836.7 million, up from $764.9 million in fiscal 2016 and representing 9% year-over-year revenue growth as we continue to transition Document Cloud to a subscription-based model. Total Digital Media segment revenue grew to $5.01 billion in fiscal 2017, up from $3.94 billion in fiscal 2016 and representing 27% year-over-year growth.
We are a market leader in the fast-growing category addressed by our Digital Marketing segment. Our Digital Marketing business provides comprehensive solutions that include analytics, social marketing, targeting, media optimization, digital experience management, cross-channel campaign management, audience management, premium video delivery and monetization. These comprehensive solutions enable marketers to measure, personalize and optimize marketing campaigns and digital experiences across channels for optimal marketing performance. In March 2017, we migrated our hierarchy of solutions under what was formerly known as Adobe Marketing Cloud includes six solutions addressing the expanding needs of marketers, the newest of which is Adobe Campaign—a cross-channel campaign management tool that we added to our portfolio withnext generation offering referred to as Adobe Experience Cloud.
Adobe Experience Cloud consists of the following cloud offerings:
Adobe Marketing Cloud—provides an integrated set of solutions to help marketers differentiate their brands and engage their customers, helping businesses manage, personalize, and orchestrate campaigns and customer journeys; includes Adobe Experience Manager (“AEM”), Adobe Campaign, Adobe Target, Adobe Social and Adobe Primetime.
Adobe Analytics Cloud—enables businesses to move from insights to actions in real time by uniquely integrating audiences as the core system of intelligence for the enterprise; makes data available across all Adobe clouds through the capture, aggregation, rationalization and understanding of vast amounts of disparate data and then translating that data into singular customer profiles; includes Adobe Analytics and Adobe Audience Manager.
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; combines capabilities from Adobe Media Optimizer (“AMO”) and Adobe’s acquisition of NeolaneTubeMogul during the thirdfirst quarter of fiscal 2013.2017.
Revenue from Adobe Marketing Cloud increased 15% during fiscal 2014 compared
In addition to the year-ago period. Helping to drive this performance was strong adoption across our portfolio of Adobe Marketing Cloud solutions including solid growthchief marketing officers and digital marketers, users of our Adobe Experience Manager (“AEM”)Cloud solutions include advertisers, campaign managers, digital marketers, publishers, data analysts, content managers, social marketers and marketing executives. These customers often are involved in workflows that utilize other Adobe Campaignproducts, such as our Digital Media offerings.
AEM and Adobe Campaign have historically been licensed by By combining the creativity of our Digital Media business with the science of our Digital Marketing business, we help our customers as on premise offerings whereto 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 revenue has been recognized at the time of the transactions. During fiscal 2014, we saw increased customer adoption of term-based licensing
of our AEM and Adobe CampaignExperience Cloud solutions, where revenue is booked and recognized ratably. We believe this is resulting in larger customer engagements, more predictable revenue as well as higher long-term revenue growth.
In evaluatingan 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. We achieved record Adobe MarketingExperience Cloud revenue performance, we believe it is important to understand this licensing and revenue mix shift that is occurring with AEM and Adobe Campaign. In fiscal 2013, approximately 45% of our AEM and Adobe Campaign contracts were term-based. Entering fiscal 2014, based on our goal of migrating more of these solutions to be term-based, we expected a mix of approximately 60% term-based contracts for AEM and Adobe Campaign this fiscal year. Due to strong execution and customer demand, we saw an acceleration of term-based adoption of AEM and Adobe Campaign$2.03 billion in fiscal 2014 and these solutions achieved approximately 75% term-based contracts this year.2017, which represents 24% year-over-year growth.
Financial Performance Summary for Fiscal 2014
Consistent with our strategy, during fiscal 2014, our subscription revenue as a percentage of total revenue increased to 50% from 28% and 15% compared with fiscal 2013 and 2012, respectively, as we have transitioned more of our business to a subscription-based model.
We exited fiscal 2014 with 3.454 million paid Creative Cloud subscriptions, up 140% from 1.439 million at the end of fiscal 2013.2017
Total Digital Media ARR of approximately $1.95$5.23 billion as of November 28, 2014December 1, 2017 increased by $1.00$1.24 billion, or 106%31%, from $944 million$3.99 billion as of November 29, 2013.December 2, 2016. The change in our Digital Media ARR was primarily due to increases in the number of paid Creative Cloud individual and team subscriptions and adoption of our enterprise Creative Cloud offering through our ETLAs.
Adobe Marketing Cloud revenue of $1.17 billion increased by $154.3 million, or 15%, during fiscal 2014, from $1.02 billion in fiscal 2013, and $212.3 million, or 26%, during fiscal 2013 from $803.7 million in fiscal 2012. The increases were primarily due to strong adoption of our AEM offeringCreative Cloud and Adobe Document Cloud offerings.
Creative revenue of $4.17 billion increased by $997.8 million, or 31%, during fiscal 2017, from $3.18 billion in fiscal 2016. The increase was primarily due to the additionincrease in subscription revenue associated with our Creative Cloud offerings.
Adobe Experience Cloud revenue of Neolane$2.03 billion increased by $398.9 million, or 24%, during fiscal 2017, from $1.63 billion in fiscal 2016. The increase was primarily due to increases in revenue associated with our Advertising Cloud offerings, including TubeMogul which we acquired in the thirdfirst quarter of fiscal 2013.2017, and increases in subscription revenue associated with our Adobe Marketing Cloud offerings, including AEM and Adobe Campaign.
Our total deferred revenue of $1.16$2.49 billion as of November 28, 2014December 1, 2017 increased by $326.5$479.8 million, or 39%24%, from $828.8 million$2.01 billion as of November 29, 2013,December 2, 2016. The increase was primarily due to increases in Creative Cloud team and individual subscriptions, and ETLAs. To a lesser extent, new contracts and existing contractthe timing of renewals for our Adobe MarketingExperience Cloud services contributed to this increase as our retention rates for Adobe Marketing Cloud services have been improving slightly over time.services.
Cost of revenue of $622.1 million$1.01 billion increased by $35.5$190.6 million, or 6%23%, during fiscal 2014,2017, from $586.6$819.9 million in fiscal 2013, and $102.8 million, or 21%, during fiscal 2013 from $483.8 million in fiscal 2012. These increases were2016. The increase was primarily due to increased hosting and serverincreases in media costs associated with our subscriptionAdvertising Cloud offerings, data center and SaaS offerings,hosting costs associated with compensation and related benefits driven by additional headcount and royalty costs.increased headcount.
Operating expenses of $3.11$4.12 billion increased by $66.3$582.0 million, or 2%16%, during fiscal 2014,2017, from $3.05$3.54 billion in fiscal 2013, and $306.3 million, or 11%, in fiscal 2013 from $2.74 billion in fiscal 2012. These increases were2016. The increase was primarily due to increased costs associated withheadcount and stock based compensation and related benefits.expense.
Net income of $268.4 million decreased$1.69 billion increased by $21.6$525.2 million, or 7%45%, during fiscal 20142017 from $290.0 million$1.17 billion in fiscal 2013, and $542.8 million, or 65%, during fiscal 2013 from $832.8 million2016 primarily due to increases in fiscal 2012.subscription revenue.
Net cash flow from operations of $1.29$2.91 billion during fiscal 20142017 increased by $135.8$713.1 million, or 12%32%, from $1.15$2.20 billion during fiscal 20132016 primarily due to cash inflows associated with the increases in deferred revenue and taxes payable, offset in part by lowerhigher net income. Net cash flow from operations during fiscal 2013 decreased by $347.9 million, or 23%, from $1.50 billion during fiscal 2012 primarily due to lower net income.
Revenue (dollars in millions)
Revenue for fiscal 2016 benefited from an extra week in the first quarter of fiscal 2016 due to our 52/53 week financial calendar whereby fiscal 2016 was a 53-week year compared with fiscal 2017 and 2015, which were 52-week years.
| | | | | Fiscal
2014 | | Fiscal
2013 | | Fiscal
2012 | | % Change 2014-2013 | | % Change 2013-2012 | | Fiscal
2017 | | Fiscal
2016 | | Fiscal
2015 | | % Change
2017-2016 | | % Change
2016-2015 |
| Subscription | | | $ | 6,133.9 |
| | $ | 4,584.8 |
| | $ | 3,223.9 |
| | 34 | % | | 42 | % |
| Percentage of total revenue | | | 84 | % | | 78 | % | | 67 | % | | | | |
| Product | | $ | 1,627.8 |
| | $ | 2,470.1 |
| | $ | 3,342.8 |
| | (34 | )% | | (26 | )% | | 706.7 |
| | 800.5 |
| | 1,125.1 |
| | (12 | )% | | (29 | )% |
| Percentage of total revenue | | 39 | % | | 61 | % | | 76 | % | | | | | |
| Subscription | | 2,076.6 |
| | 1,137.9 |
| | 673.2 |
| | 82 | % | | 69 | % | |
| Percentage of total revenue | | 50 | % | | 28 | % | | 15 | % | | | | | | 10 | % | | 14 | % | | 24 | % | | | | |
| Services and support | | 442.7 |
| | 447.2 |
| | 387.7 |
| | (1 | )% | | 15 | % | | 460.9 |
| | 469.1 |
| | 446.5 |
| | (2 | )% | | 5 | % |
| Percentage of total revenue | | 11 | % | | 11 | % | | 9 | % | | | | | | 6 | % | | 8 | % | | 9 | % | | | | |
| Total revenue | | $ | 4,147.1 |
| | $ | 4,055.2 |
| | $ | 4,403.7 |
| | 2 | % | | (8 | )% | | $ | 7,301.5 |
| | $ | 5,854.4 |
| | $ | 4,795.5 |
| | 25 | % | | 22 | % |
Our subscription revenue is comprised primarily of fees we charge for our subscription and hosted service offerings including Creative Cloud and certain of our Adobe MarketingExperience Cloud services and Creative Cloud.Document Cloud services. We recognize subscription revenue ratably over the term of agreements with our customers, beginning on thewith commencement of the service. We expect our subscription revenue will continue to increase as a result of our investments in new SaaS and subscription models. We also expect this to increase the amount of recurring revenue we generate as a percent of our total revenue.
We have the following reportable segments—Digital Media, Digital Marketing and Print and Publishing. Subscription revenue by reportable segment for fiscal 20142017, 20132016 and 20122015 is as follows (dollars in millions):
| | | | | Fiscal
2014 | | Fiscal
2013 | | Fiscal
2012 | | % Change 2014-2013 | | % Change 2013-2012 | | Fiscal
2017 | | Fiscal
2016 | | Fiscal
2015 | | % Change
2017-2016 | | % Change
2016-2015 |
| Digital Media | | $ | 1,268.3 |
| | $ | 471.9 |
| | $ | 116.8 |
| | 169 | % | | 304 | % | | $ | 4,480.8 |
| | $ | 3,370.8 |
| | $ | 2,264.7 |
| | 33 | % | | 49 | % |
| Digital Marketing | | 797.5 |
| | 663.1 |
| | 555.5 |
| | 20 | % | | 19 | % | | 1,609.5 |
| | 1,180.4 |
| | 937.0 |
| | 36 | % | | 26 | % |
| Print and Publishing | | 10.8 |
| | 2.9 |
| | 0.9 |
| | * |
| | * |
| | 43.6 |
| | 33.6 |
| | 22.2 |
| | 30 | % | | 51 | % |
| Total subscription revenue | | $ | 2,076.6 |
| | $ | 1,137.9 |
| | $ | 673.2 |
| | 82 | % | | 69 | % | | $ | 6,133.9 |
| | $ | 4,584.8 |
| | $ | 3,223.9 |
| | 34 | % | | 42 | % |
_________________________________________
| |
(*)
| Percentage is not meaningful. |
Our services and support revenue is comprised of consulting, training and maintenance and support, primarily related to the licensing of our enterprise developer and platform productsofferings and the sale of our hosted Adobe MarketingExperience Cloud services. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. 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.
Segments
In fiscal 20142017, we categorized our products into the following reportable segments:
Digital Media—Our Digital Media segment provides tools and solutions that enable individuals, small and medium businesses and enterprises to create, publish, promote and monetize their digital content anywhere. Our customers include traditional content creators, web application developers and digital media professionals, as well as their management in marketing departments and agencies, companies and publishers. Our customers also include knowledge workers who create, collaborate and distribute documents.
Digital Marketing—Our Digital Marketing segment provides solutions and services for how digital advertising and marketing are created, managed, executed, measured and optimized. Our customers include digital marketers, advertisers, publishers, merchandisers, web analysts, chief marketing officers, chief information officers and chief revenue officers.
Print and Publishing—Our Print and Publishing 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.
Segment Information (dollars in millions)
| | | | | Fiscal
2014 | | Fiscal
2013 | | Fiscal
2012 | | % Change 2014-2013 | | % Change 2013-2012 | | Fiscal
2017 | | Fiscal
2016 | | Fiscal
2015 | | % Change
2017-2016 | | % Change
2016-2015 |
| Digital Media | | $ | 2,603.2 |
| | $ | 2,625.9 |
| | $ | 3,101.9 |
| | (1 | )% | | (15 | )% | | $ | 5,010.6 |
| | $ | 3,941.0 |
| | $ | 3,095.2 |
| | 27 | % | | 27 | % |
| Percentage of total revenue | | 63 | % | | 65 | % | | 70 | % | | | | | | 69 | % | | 67 | % | | 65 | % | | | | |
| Digital Marketing | | 1,355.2 |
| | 1,228.8 |
| | 1,085.0 |
| | 10 | % | | 13 | % | | 2,120.0 |
| | 1,736.6 |
| | 1,508.9 |
| | 22 | % | | 15 | % |
| Percentage of total revenue | | 33 | % | | 30 | % | | 25 | % | | | | | | 29 | % | | 30 | % | | 31 | % | | | | |
| Print and Publishing | | 188.7 |
| | 200.5 |
| | 216.8 |
| | (6 | )% | | (8 | )% | | 170.9 |
| | 176.8 |
| | 191.4 |
| | (3 | )% | | (8 | )% |
| Percentage of total revenue | | 4 | % | | 5 | % | | 5 | % | | | | | | 2 | % | | 3 | % | | 4 | % | | | | |
| Total revenue | | $ | 4,147.1 |
| | $ | 4,055.2 |
| | $ | 4,403.7 |
| | 2 | % | | (8 | )% | | $ | 7,301.5 |
| | $ | 5,854.4 |
| | $ | 4,795.5 |
| | 25 | % | | 22 | % |
Fiscal 20142017 Revenue Compared to Fiscal 20132016 Revenue
Digital Media
Revenue from Digital Media decreased slightlyincreased $1.07 billion during fiscal 20142017 as compared to fiscal 2013. The slight decrease was2016, primarily driven by declines in revenue associated with distribution of third-party software downloads and Hobbyist products launched in fiscal 2013. With respect to the Hobbyist product revenue decline, we are actively migrating customers to our Creative Cloud Photography Plan for which revenue is recognized ratably. Largely offsetting these decreases were increases in Creative Cloud and Document Services revenue.
Revenue related to our creative professional products, which includes our Creative Cloud, Creative Suite editions and CS point products, increased during fiscal 2014 as compared to fiscal 2013 due to increases in revenue from subscriptions and ETLAs, partially offset by the decrease in revenue from CS point products and Creative Suite editions as we discontinued the general availability of our perpetually licensed CS6 products in the second quarter of 2014.
Revenue associated with our other creative products decreased during fiscal 2014 as compared to fiscal 2013 primarily due to decreases associated with distribution of third-party software downloads and Hobbyist products launched in fiscal 2013. Additionally, actively migrating customers to our Creative Cloud Photography Plan is also contributing to the year-over-year decline in revenue. These decreases were offset in part by increases in revenue associated with our Digital Publishing Suite.creative offerings.
For
Revenue associated with our creative offerings, the total number of perpetual unitswhich includes our Creative Cloud, perpetually licensed decreased while the number of subscription units licensedcreative and stock photography offerings, increased during fiscal 2014 as compared2017. The increase was primarily due to fiscal 2013. Unit average selling prices foran increase in subscription revenue associated with our perpetual units licensed decreased during fiscal 2014 as comparedCreative Cloud offerings driven by increases in individual, team and enterprise subscriptions. Also contributing to fiscal 2013.the increase in revenue was revenue growth associated with our Creative Cloud Photography Plan subscription offering.
Adobe Document ServicesCloud revenue, which includes our Acrobat product family and Adobe Sign service, increased during fiscal 20142017 as compared with the year-ago periodto fiscal 2016 primarily due to increases in Document Cloud subscriptions revenue, offset in part by expected declines in revenue associated with our perpetually licensed Acrobat offering. Also contributing to the increase in Document Cloud Servicesrevenue was an increase in Adobe Sign revenue. The increases were slightly offset by decreases due to our continued shift to ETLAs.
Within Document Services, excluding large enterprise license agreements, the number of units licensed decreased while the unit average selling prices remained stable during fiscal 2014, as compared with the year-ago period.
Digital Marketing
Revenue from Digital Marketing increased $126.3$383.4 million during fiscal 20142017, as compared to fiscal 20132016 primarily due to continuedsubscription revenue growth associated with our Adobe Experience Cloud. The increase in subscription revenue was driven by strong performance with our Adobe Marketing Cloud offerings, which increased 15% during fiscal 2014 as compared with the year-ago period. Contributing to this increase wasinclude AEM and Adobe Campaign, and our Adobe Analytics Cloud offerings, which includes Audience Manager. Also contributing to the strong adoptionincrease in Adobe Experience Cloud revenue were increases in revenue associated with our Adobe Advertising Cloud offerings, including Tubemogul which we acquired in the first quarter of AEM.fiscal 2017.
Print and Publishing
Revenue from Print and Publishing decreased during fiscal 2014 as compared to fiscal 2013 primarily due to decreases in legacy product revenue and increased ETLAs for certain products in this group.
Fiscal 20132016 Revenue Compared to Fiscal 20122015 Revenue
Digital Media
Revenue from Digital Media decreased $476.0increased $845.8 million during fiscal 20132016 as compared to fiscal 2012,2015, primarily due to continued strong adoption of Creative Cloud and ETLAs as we continued to transition more of our business to a subscription-based model.
Revenue related todriven by increases in revenue associated with our creative professional products, which include our Creative Suite editions and CS point products as well as Creative Cloud, decreased during fiscal 2013 as compared to fiscal 2012 due to continued customer adoption of Creative Cloud subscription offerings, released in May 2012, for which revenue is recognized over time.offerings.
Revenue associated with our other creative productsofferings, which includes our Creative Cloud, perpetually licensed creative and stock photography offerings, increased during fiscal2013 2016 as compared to fiscal 2012,2015 primarily due to increasesthe increase in subscription revenue associated with distributionour Creative Cloud offerings driven by increases in the number of third-party software downloadspaid Creative Cloud individual and team subscriptions, and continued adoption of our Digital Publishing Suite. TheseETLAs. To a lesser extent, increases were partially offset by decreases in revenue associated with our Hobbyist products.
ForCreative Cloud Photography Plan subscription offering and stock photography offerings also contributed to the increase in revenue associated with our creative offerings. Increases associated with our creative offerings the total number of perpetual units licensed decreased while the number of subscription units licensed increased during fiscal 2013 as compared to fiscal 2012. Unit average selling prices forwere slightly offset by expected declines in revenue associated with our perpetual units licensed decreased during the year ended fiscal 2013 as compared to fiscal 2012.creative offerings and distribution of third-party software downloads.
Document ServicesCloud revenue, which includes our Acrobat product family and Adobe Sign service, decreased slightly during fiscal 20132016 as compared to fiscal 2012,2015, primarily due to the continued shift to ETLAsexpected decreases in revenue associated with our Acrobat perpetual license offering. Decreases were partially offset by increased Acrobatincreases in revenue associated with our Document Cloud Services revenue including revenue generated fromsubscription offerings as we continue to migrate more customers to our EchoSign e-signing service.Document Cloud, along with increases in Adobe Sign revenue.
Within Document Services, excluding large enterprise license agreements, the number of units licensed decreased while the unit average selling prices increased during fiscal 2013 as compared to fiscal 2012.
Digital Marketing
Revenue from Digital Marketing increased $143.8$227.7 million during fiscal 20132016, as compared to fiscal 2012. The increase was2015 primarily due to continued revenue growth associated with our Adobe MarketingExperience Cloud, which increased 26% during fiscal 2013, as compared20% year over year. Increases in Adobe Experience Cloud revenue were largely driven by the continued adoption of our AEM offerings and, to a lesser extent, the year ago period and includes Adobe Campaign revenue from our acquisition of Neolane in the third quarter of fiscal 2013. The increase noted above was partially offset by expected declines in revenue associated with our legacy products during fiscal 2013.
Print and Publishing
Revenue from Print and Publishing decreased during fiscal 2013 as comparedAdobe Campaign. Also contributing to fiscal 2012, primarily due to increased ETLAs for certain productsthe increase in this group.Digital Marketing revenue was the increase in Adobe Analytics Cloud revenue.
Geographical Information (dollars in millions)
| | | | | Fiscal
2014 | | Fiscal
2013 | | Fiscal
2012 | | % Change 2014-2013 | | % Change 2013-2012 | | Fiscal
2017 | | Fiscal
2016 | | Fiscal
2015 | | % Change
2017-2016 | | % Change
2016-2015 |
| Americas | | $ | 2,314.4 |
| | $ | 2,134.4 |
| | $ | 2,196.4 |
| | 8 | % | | (3 | )% | | $ | 4,216.5 |
| | $ | 3,400.1 |
| | $ | 2,788.1 |
| | 24 | % | | 22 | % |
| Percentage of total revenue | | 56 | % | | 53 | % | | 50 | % | | | | | | 58 | % | | 58 | % | | 58 | % | | | | |
| EMEA | | 1,179.9 |
| | 1,129.2 |
| | 1,294.6 |
| | 4 | % | | (13 | )% | | 1,985.1 |
| | 1,619.2 |
| | 1,336.4 |
| | 23 | % | | 21 | % |
| Percentage of total revenue | | 28 | % | | 28 | % | | 29 | % | | | | | | 27 | % | | 28 | % | | 28 | % | | | | |
| APAC | | 652.8 |
| | 791.6 |
| | 912.7 |
| | (18 | )% | | (13 | )% | | 1,099.9 |
| | 835.1 |
| | 671.0 |
| | 32 | % | | 24 | % |
| Percentage of total revenue | | 16 | % | | 19 | % | | 21 | % | | | | | | 15 | % | | 14 | % | | 14 | % | | | | |
| Total revenue | | $ | 4,147.1 |
| | $ | 4,055.2 |
| | $ | 4,403.7 |
| | 2 | % | | (8 | )% | | $ | 7,301.5 |
| | $ | 5,854.4 |
| | $ | 4,795.5 |
| | 25 | % | | 22 | % |
Fiscal 20142017 Revenue by Geography Compared to Fiscal 20132016 Revenue by Geography
Overall revenue during fiscal 20142017 increased in all geographic regions as compared to fiscal 2013 increased in the Americas and EMEA. Revenue in the Americas increased during fiscal 2014 as compared to the year-ago period2016 primarily due to increases in Digital Media and Digital Marketing revenue. Revenue in EMEA increased during fiscal 2014 as compared to the year-ago period primarily due to increases in Digital Marketing revenue. Digital Media and Print and Publishing revenue in EMEA remained relatively stable during fiscal 2014 compared to the year-ago period. Despite the strengthening of the U.S. Dollar against the Euro and the British Pound during the latter part of 2014, the overall weakening of the U.S. Dollar against these currencies during fiscal 2014 also caused revenue in EMEA to increase as compared to the year-ago period. Within the Americas and EMEA, the fluctuations in revenue by reportable segment were attributable to the factors noted in the segment information above.
Revenue in APAC decreased during fiscal 2014 as compared to the year-ago period primarily as a result of decreases in Digital Media revenue due to slower adoption of Creative Cloud in Japan compared to other countries and the strengthening of the U.S. Dollar against the Japanese Yen and other Asian currencies during fiscal 2014 as compared to the year-ago period. Digital Marketing and Print and Publishing revenue in APAC remained relatively stable in fiscal 2014 compared to the year-ago period.
Fiscal 2013 Revenue by Geography Compared to Fiscal 2012 Revenue by Geography
Revenue declined across all geographies during fiscal 2013 as compared to fiscal 2012. Revenue in the Americas and APAC decreased during fiscal 2013 due to decreases in Digital Media and Print and Publishing revenue, offset in part by increases in Digital Marketing revenue. Revenue in EMEA decreased during fiscal 2013 due to decreases in Digital Media revenue, offset in part by increases in Digital Marketing and Print and Publishing revenue. Within each geographicalgeographic region, the fluctuations in revenue by reportable segment were attributable to the factors noted in the segment information above. Further, the overall increase in EMEA revenue was slightly offset by declines due to the relative strength of the U.S. Dollar against EMEA currencies as discussed below.
Fiscal 2016 Revenue by Geography Compared to Fiscal 2015 Revenue by Geography
Overall revenue during fiscal 2016 increased in all geographic regions as compared to fiscal 2015 primarily due to increases in Digital Media and Digital Marketing revenue, slightly offset by a decrease in Print and Publishing revenue. Within each geographic region, fluctuations in revenue by reportable segment were attributable to the factors noted in the segment information above. Further, the overall increase in EMEA revenue was partially offset by declines due to the relative strength of the U.S. Dollar against EMEA currencies as discussed below.
Included in the overall change in revenue for fiscal 20142017 and fiscal 20132016 were impacts associated with foreign currency as shown below. Our currency hedging program is used to mitigate a portion of the foreign currency impact to revenue.
| | | (in millions) | Fiscal
2014 | | Fiscal
2013 | Fiscal
2017 | | Fiscal
2016 |
| Revenue impact: | Increase/(Decrease) | Increase/(Decrease) |
| EMEA: | | | | |
| Euro | $ | 12.3 |
| | $ | 9.1 |
| $ | (2.3 | ) | | $ | (50.2 | ) |
| British Pound | 12.9 |
| | (3.9 | ) | (46.1 | ) | | (36.2 | ) |
| Other currencies | (0.2 | ) | | 0.6 |
| |
| Total EMEA | 25.0 |
| | 5.8 |
| |
| Japanese Yen | (25.7 | ) | | (63.6 | ) | 4.0 |
| | 15.0 |
|
| Other currencies | (8.9 | ) | | (5.6 | ) | 6.1 |
| | (21.7 | ) |
| Total revenue impact | (9.6 | ) | | (63.4 | ) | (38.3 | ) | | (93.1 | ) |
| Hedging impact: | | | | | | |
| EMEA | 10.1 |
| | 3.7 |
| |
| Euro | | 13.7 |
| | 4.2 |
|
| British Pound | | 7.1 |
| | 14.5 |
|
| Japanese Yen | 8.6 |
| | 32.3 |
| 12.1 |
| | 0.1 |
|
| Total hedging impact | 18.7 |
| | 36.0 |
| 32.9 |
| | 18.8 |
|
| Total impact | $ | 9.1 |
| | $ | (27.4 | ) | $ | (5.4 | ) | | $ | (74.3 | ) |
During fiscal 2014,2017, the U.S. Dollar strengthened against the Japanese Yen and other Asian currencies causingBritish Pound, which negatively impacted revenue in APACEMEA measured in U.S. Dollar equivalents to decrease compared with the year-ago period. This decrease was offset by the favorableequivalents. The net foreign currency impact to revenue was offset in part by hedging gains from our EMEA and Japanese Yen currencies hedging programs during fiscal 2017.
During fiscal 2016, the U.S. Dollar strengthened against the Euro and British Pound which negatively impacted revenue in EMEA measured in U.S. Dollar equivalents. This impact was partially offset by hedging gains from our EMEA currencies ashedging programs during fiscal 2016. During fiscal 2016, the U.S. Dollar weakened against the Euro andJapanese Yen, the British Pound forimpact of which was offset by the majorityimpact of fiscal 2014. Our EMEA and Yen currency hedging programs resulted in hedging gains during fiscal 2014.
During fiscal 2013, the U.S. Dollar strengthenedstrengthening against the Japanese Yen and other Asian currencies causing revenue in APAC measured in U.S. Dollar equivalents to decrease compared with the year-ago period. This decrease was partially offset by the favorable impact to revenue measured in EMEA currencies as the U.S. Dollar generally weakened against these currencies. Our EMEA and Yen currency hedging programs resulted in hedging gains during fiscal 2013.
Product Backlog
The actual amount of product backlog at any particular time may not be a meaningful indicator of future business prospects. Shippable backlog is comprised of unfulfilled orders, excluding those associated with new product releases, those pending credit review and those not shipped due to the application of our global inventory policy. We had minimal shippable backlog at the end of the fourth quarter of fiscal 2014 and fiscal 2013. We expect that our shippable backlog will continue to be insignificant in future periods.
The deferredDeferred revenue balance on our consolidated balance sheet consists of billings and payments received in advance of revenue recognition for our products and solutions and does not represent the total contract value of existing annual or multi-year, non-cancellablenon-cancelable commercial subscription, agreements.SaaS and managed services agreements or government contracts with fiscal funding clauses. Unbilled deferred revenue represents expected future billings whichthat are contractually committed under our existing subscription, SaaS and managed services agreements that have not been invoiced and are not recorded in deferred revenue within our financial statements. Our presentation of unbilled deferred revenue backlog may differ from that of other companies in the industry. As of November 28, 2014,December 1, 2017, we had unbilled deferred revenue backlog of approximately $1.7$3.94 billion of which approximately 60%40% to 65%50% is not reasonably expected to be billed during fiscal 2015. As of November 29, 2013,2018. Comparatively, we had unbilled deferred revenue backlog of approximately $1.0 billion.$3.42 billion as of December 2, 2016, of which approximately 40% to 50% was not reasonably expected to be billed during fiscal 2017.
We expect that the amount of unbilled deferred revenue backlog will change from period to period due to certain factors, including the timing and duration of large customer subscription,subscriptions, SaaS and managed service agreements, varying billing cycles of these agreements, the timing of customer renewals, the timing of when unbilled deferred revenue backlog is to be billed, changes in customer financial circumstances and foreign currency fluctuations. Additionally, the unbilled deferred revenue backlog for multi-year subscription agreements that are billed annually is typically higher at the beginning of the contract period, lower prior to renewal and typically increases when the agreement is renewed. Accordingly, fluctuations in unbilled deferred revenue backlog may not be a reliable indicator of future business prospects and the related revenue associated with these contractual commitments.
Cost of Revenue (dollars in millions)
| | | | | Fiscal
2014 | | Fiscal
2013 | | Fiscal
2012 | | % Change 2014-2013 | | % Change 2013-2012 | | Fiscal
2017 | | Fiscal
2016 | | Fiscal
2015 | | % Change
2017-2016 | | % Change
2016-2015 |
| Subscription | | | $ | 623.0 |
| | $ | 461.9 |
| | $ | 409.2 |
| | 35 | % | | 13 | % |
| Percentage of total revenue | | | 9 | % | | 8 | % | | 9 | % | | | | |
| Product | | $ | 97.1 |
| | $ | 138.2 |
| | $ | 121.7 |
| | (30 | )% | | 14 | % | | 57.1 |
| | 68.9 |
| | 90.0 |
| | (17 | )% | | (23 | )% |
| Percentage of total revenue | | 2 | % | | 3 | % | | 3 | % | | | | | |
| Subscription | | 335.5 |
| | 278.1 |
| | 219.1 |
| | 21 | % | | 27 | % | |
| Percentage of total revenue | | 8 | % | | 7 | % | | 5 | % | | | | | | 1 | % | | 1 | % | | 2 | % | | | | |
| Services and support | | 189.5 |
| | 170.3 |
| | 143.0 |
| | 11 | % | | 19 | % | | 330.4 |
| | 289.1 |
| | 245.1 |
| | 14 | % | | 18 | % |
| Percentage of total revenue | | 5 | % | | 4 | % | | 3 | % | | | | | | 5 | % | | 5 | % | | 5 | % | | | | |
| Total cost of revenue | | $ | 622.1 |
| | $ | 586.6 |
| | $ | 483.8 |
| | 6 | % | | 21 | % | | $ | 1,010.5 |
| | $ | 819.9 |
| | $ | 744.3 |
| | 23 | % | | 10 | % |
Subscription
Cost of subscription revenue consists of third-party royalties and expenses related to operating our network infrastructure, including depreciation expense and operating lease payments associated with computer equipment, 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 for our Adobe Advertising Cloud offerings.
Cost of subscription revenue increased due to the following:
|
| | | | | |
| | % Change
2017-2016 | | % Change
2016-2015 |
| Media costs | 9 |
| | — |
|
| Hosting services and data center costs | 7 |
| | 9 |
|
| Royalty costs | 6 |
| | 2 |
|
| Base compensation and related benefits associated with headcount | 6 |
| | 2 |
|
| Incentive compensation, cash and stock based | 5 |
| | — |
|
| Amortization of purchased intangibles | 2 |
| | (4 | ) |
| Depreciation expense | (1 | ) | | 2 |
|
| Various individually insignificant items | 1 |
| | 2 |
|
| Total change | 35 | % | | 13 | % |
Media costs increased during fiscal 2017 as compared to fiscal 2016 primarily due to our TubeMogul advertising platform offerings, which are part of the Adobe Advertising Cloud and were acquired through our acquisition of TubeMogul in the first quarter of fiscal 2017. Royalty costs increased due to increases in obligations to certain key vendors for technology use.
Hosting services and data center costs increased in all periods presented primarily due to the continued increase in transaction volumes in our Adobe Experience Cloud and Creative Cloud offerings.
The increase in cost of subscription revenue during fiscal 2016 compared to fiscal 2015 were partially offset by decreases in amortization of purchased intangibles driven by the decrease in amortization expense associated with intangible assets purchased through our acquisitions of Omniture and Efficient Frontier that became fully amortized in the latter part of fiscal 2015.
Product
Cost of product revenue includes product packaging, third-party royalties, excess and obsolete inventory, amortization related to localization costs, purchased intangibles and acquired rights to use technology and the costs associated with the manufacturing of our products.
Fluctuations inAs a result of redirecting our focus and development efforts towards our Creative Cloud and Adobe Experience Cloud subscription offerings, our cost of product revenue aredeclined in all periods presented due to the following:
| | | | % Change 2014-2013 | | % Change 2013-2012 | % Change
2017-2016 | | % Change
2016-2015 |
| Amortization of purchased intangibles and technology license arrangements | (20 | )% | | 27 | % | |
| Amortization of purchased intangibles | | (7 | )% | | (16 | )% |
| Localization costs | | — | % | | (10 | )% |
| Royalty costs | | (8 | )% | | 10 | % |
| Cost of sales | (4 | ) | | (8 | ) | (2 | )% | | (2 | )% |
| Royalty cost | (2 | ) | | — |
| |
| Excess and obsolete inventory | 1 |
| | (4 | ) | — |
| | (3 | ) |
| Various individually insignificant items | (5 | ) | | (1 | ) | — |
| | (2 | ) |
| Total change | (30 | )% | | 14 | % | (17 | )% | | (23 | )% |
Cost of product revenue decreased during fiscal 2014 as compared to fiscal 2013 primarily due to decreasesThe decrease in amortization of purchased intangibles and technology license arrangements, cost of sales and royalty costs, slightly offset by an increase in excess and obsolete inventory. Amortization of purchased intangibles and technology license arrangements decreased as compared with the year-ago period as we entered into certain technology licensing arrangements for which payments of $26.5 million related to historical use of certain technology licensing arrangements were expensed as cost of product revenue during fiscal 2013. Cost of sales decreased as compared with the year-ago period due to decreases in the number of perpetual units sold and associated packaging costs as we continue to focus our development and sales efforts on Creative Cloud. Royalty cost decreased as compared to the year-ago period primarily due to decreases in revenue from our perpetual offerings. Excess and obsolete inventory increased as compared to the year-ago period as a result of changes in reserve requirements for CS6 shrink boxes as we have discontinued the general availability of CS6 on a perpetual licensing basis.
Cost of product revenue increased during fiscal 20132016 as compared to fiscal 2012 primarily due to2015 was partially offset by an increase in amortization of purchased intangibles and technology license arrangements offset by decreases in cost of sales and excess and obsolete inventory. Amortization of purchased intangibles and technology license arrangements increased as we entered into certain technology licensing arrangements totaling $51.8 million in the first quarter of fiscal 2013. Of this cost, an estimated $25.3 million wasroyalty payments related to future licensing rights and was capitalized and is being amortized on a straight-line basis over the estimated useful lives ranging from five to ten years. The remaining cost of approximately $26.5 million was related to historical use of licensing rights and was expensed as cost of product revenue in fiscal 2013. In connection with certain of these licensing arrangements, we have the ability to acquire additional rights to use technology in the future. Cost of sales primarily decreased due to a decline in the number ofour stock photography perpetual units sold and packaging costs associated with our CS6 products as we focus our creative development efforts on our Creative Cloud offering. Excess and obsolete inventory decreased due to decreased reserve requirements for CS6 as we continue to transition to more of a subscription-based model.
Subscription
Cost of subscription revenue consists of third-party royalties and expenses related to operating our network infrastructure, including depreciation expenses and operating lease payments associated with computer equipment, data center costs, salaries and related expenses of network operations, implementation, account management and technical support personnel, amortization of intangible assets and allocated overhead. We enter into contracts with third-parties for the use of their data center facilities and 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 increased due to the following:
|
| | | | | |
| | % Change 2014-2013 | | % Change 2013-2012 |
| Data center cost | 10 | % | | 11 | % |
| Compensation cost and related benefits associated with headcount | 4 |
| | 5 |
|
| Depreciation expense | 3 |
| | 3 |
|
| Royalty cost | 3 |
| | 4 |
|
| Amortization of purchased intangibles | — |
| | 4 |
|
| Various individually insignificant items | 1 |
| | — |
|
| Total change | 21 | % | | 27 | % |
Cost of subscription revenue increased during fiscal 2014 as compared to fiscal 2013 primarily due to data center costs, compensation cost and related benefits, deprecation expense, and royalty cost. Data center costs increased as compared with the year-ago period primarily due to higher transaction volumes in our Adobe Marketing Cloud and Creative Cloud services. Compensation cost and related benefits increased as compared to the year-ago period primarily due to additional headcount in fiscal 2014, including from our acquisition of Neolane in the third quarter of fiscal 2013. Depreciation expense increased as compared to the year-ago period primarily due to higher capital expenditures in recent periods as we continue to invest in our network and data center infrastructure to support the growth of our business. Royalty cost increased primarily due to increases in subscriptions and downloads of our SaaS offerings.
Cost of subscription revenue increased during fiscal 2013 as compared to fiscal 2012 primarily due to increased hosted server costs and amortization of purchased intangibles. Hosted server costs increased primarily due to increases in data center costs related to higher transaction volumes in our Adobe Marketing Cloud and Creative Cloud services, depreciation expense from higher capital expenditures in prior years and compensation and related benefits driven by additional headcount. Amortization of purchased intangibles increased primarily due to increased amortization of intangible assets purchased associated with our acquisitions of Behance and Neolane in fiscal 2013.
Services and Support
Cost of services and support revenue is primarily comprised of employee-related costs and associated costs incurred to provide consulting services, training and product support.
Cost of services and support revenue increased due to the following:
|
| | | | | |
| | % Change
2017-2016 | | % Change
2016-2015 |
| Base compensation and related benefits associated with headcount | 13 | % | | 9 | % |
| Incentive compensation, cash and stock based | 1 |
| | 6 |
|
| Professional and consulting fees | (3 | ) | | 3 |
|
| Various individually insignificant items | 3 |
| | — |
|
| Total change | 14 | % | | 18 | % |
Compensation costs increased during fiscal 20142017 and fiscal 2016 as compared to fiscal 2013the corresponding year ago periods primarily due to increases in compensationheadcount resulting from decreased usage of outside consultants that were providing consulting and related benefits driven by additional headcount and third-party fees relatedtraining services to training and consulting services provided to our customers.
Cost of services and support revenue increased during fiscal 2013 as compared to fiscal 2012 primarily due to increases in third-party fees related to training and consulting services provided to our customers and compensation and related benefits driven by additional headcount, including headcount from our acquisition of Neolane in fiscal 2013.
Operating Expenses (dollars in millions)
| | | | | Fiscal
2014 | | Fiscal
2013 | | Fiscal
2012 | | % Change 2014-2013 | | % Change 2013-2012 | | Fiscal
2017 | | Fiscal
2016 | | Fiscal
2015 | | % Change
2017-2016 | | % Change
2016-2015 |
| Research and development | | $ | 844.4 |
| | $ | 826.6 |
| | $ | 742.8 |
| | 2 | % | | 11 | % | | $ | 1,224.1 |
| | $ | 976.0 |
| | $ | 862.7 |
| | 25 | % | | 13 | % |
| Percentage of total revenue | | 20 | % | | 20 | % | | 17 | % | | | | | | 17 | % | | 17 | % | | 18 | % | | | | |
| Sales and marketing | | 1,652.3 |
| | 1,620.5 |
| | 1,516.1 |
| | 2 | % | | 7 | % | | 2,197.6 |
| | 1,910.2 |
| | 1,683.2 |
| | 15 | % | | 13 | % |
| Percentage of total revenue | | 40 | % | | 40 | % | | 34 | % | | | | | | 30 | % | | 33 | % | | 35 | % | | | | |
| General and administrative | | 543.3 |
| | 520.1 |
| | 435.0 |
| | 4 | % | | 20 | % | | 624.7 |
| | 576.2 |
| | 533.5 |
| | 8 | % | | 8 | % |
| Percentage of total revenue | | 13 | % | | 13 | % | | 10 | % | | | | | | 9 | % | | 10 | % | | 11 | % | | | | |
| Restructuring and other charges | | 19.9 |
| | 26.5 |
| | (2.9 | ) | | (25 | )% | | * |
| |
| Percentage of total revenue | | — | % | | 1 | % | | — | % | | | | | |
| Amortization of purchased intangibles | | 52.4 |
| | 52.3 |
| | 48.7 |
| | — | % | | 7 | % | | 76.5 |
| | 78.5 |
| | 68.7 |
| | (3 | )% | | 14 | % |
| Percentage of total revenue | | 1 | % | | 1 | % | | 1 | % | | | | | | 1 | % | | 1 | % | | 1 | % | | | | |
| Total operating expenses | | $ | 3,112.3 |
| | $ | 3,046.0 |
| | $ | 2,739.7 |
| | 2 | % | | 11 | % | | $ | 4,122.9 |
| | $ | 3,540.9 |
| | $ | 3,148.1 |
| | 16 | % | | 12 | % |
_________________________________________
| |
(*)
| Percentage is greater than 100%. |
Research and Development, Sales and Marketing and General and Administrative Expenses
The increase in research and development and general and administrative expenses during fiscal 2014 as compared to fiscal 2013 is primarily due to increases in cash incentive and stock-based compensation. The increase in stock-based compensation was driven by a change in the vesting term for stock awards granted as part of our annual review process beginning in fiscal 2013, which decreased the term from four years to three years. The increase in sales and marketing expense during fiscal 2014 as compared to fiscal 2013 is primarily due to compensation and related benefits associated with additional headcount.
The increase in researchResearch and development, sales and marketing and general and administrative expenses increased during fiscal 20132017 as compared to fiscal 2012 is2016 primarily due to higher cash incentive compensation program achievement in fiscal 2013, increases in compensation costs driven by headcount increases and stock-based compensation expense due to higher share pricesexpense.
Research and development, sales and marketing and general and administrative expenses increased during fiscal 20132016 as compared to fiscal 2012 as well as a shorter vesting term which decreased from four years2015 primarily due to three years for stock awards granted as part of our annual review process during fiscal 2013.increases in compensation and related benefits associated with headcount increases.
Research and Development
Research and development expenses consist primarily of salary and benefit expenses for software developers, contracted development efforts, related facilities costs and expenses associated with computer equipment used in software development.
Research and development expenses increased due to the following:
| | | | % Change 2014-2013 | | % Change 2013-2012 | % Change
2017-2016 | | % Change
2016-2015 |
| Compensation associated with cash and stock-based incentives | 2 | % | | 7 | % | |
| Compensation and related benefits associated with headcount | — |
| | 3 |
| |
| Base compensation and related benefits associated with headcount | | 11 | % | | 6 | % |
| Incentive compensation, cash and stock based | | 9 |
| | 4 |
|
| Professional and consulting fees | | 4 |
| | 4 |
|
| Various individually insignificant items | — |
| | 1 |
| 1 |
| | (1 | ) |
| Total change | 2 | % | | 11 | % | 25 | % | | 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 products.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 application, toolsubscription and service offerings.offerings, applications and tools.
Sales and Marketing
Sales and marketing expenses consist primarily of salary and benefit expenses, 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 for fiscal 2014 are lower than what was reported in our December 11, 2014 earnings press release by $19.5 million reflecting an update to our sales commission expense based on information received following the date of our press release.
Sales and marketing expenses increased due to the following:
| | | | % Change 2014-2013 | | % Change 2013-2012 | % Change
2017-2016 | | % Change
2016-2015 |
| Compensation and related benefits associated with headcount | 1 | % | | 4 | % | |
| Compensation associated with cash and stock-based incentives | — |
| | 4 |
| |
| Base compensation and related benefits associated with headcount | | 5 | % | | 5 | % |
| Incentive compensation, cash and stock based | | 2 |
| | 2 |
|
| Professional and consulting fees | | 2 |
| | 1 |
|
| Marketing spending related to product launches and overall marketing efforts | | 4 |
| | 4 |
|
| Various individually insignificant items | 1 |
| | (1 | ) | 2 |
| | 1 |
|
| Total change | 2 | % | | 7 | % | 15 | % | | 13 | % |
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:
|
| | | | | |
| | % Change 2014-2013 | | % Change 2013-2012 |
| Compensation associated with cash and stock-based incentives | 3 | % | | 4 | % |
| Compensation and related benefits associated with headcount growth | — |
| | 4 |
|
| Loss contingency | 2 |
| | — |
|
| Professional and consulting fees | (2 | ) | | 7 |
|
| Charitable contributions | — |
| | 2 |
|
| Various individually insignificant items | 1 |
| | 3 |
|
| Total change | 4 | % | | 20 | % |
|
| | | | | |
| | % Change
2017-2016 | | % Change
2016-2015 |
| Base compensation and related benefits associated with headcount | 2 | % | | 3 | % |
| Incentive compensation, cash and stock based | 3 |
| | 3 |
|
| Professional and consulting fees | 1 |
| | 1 |
|
| Facilities and telecom | 2 |
| | 1 |
|
| Total change | 8 | % | | 8 | % |
See Note 15 of our Notes to the Consolidated Financial Statements for further information regarding the loss contingency.
Professional and consulting fees increased during fiscal 2013 as compared to fiscal 2012 primarily due to increased professional and legal fees including those associated with the attacks on our network discovered in September 2013.
Restructuring and Other Charges
During the past several years, we have initiated various restructuring plans. During fiscal 2014, in connection with our recent Fiscal 2014 Restructuring Plan, we recorded $19.4 million associated with termination benefits and closing redundant facilities. In connection with our Other Restructuring Plans, we recorded insignificant charges associated with closing redundant facilities. We also recorded minor adjustments for changes in previous estimates during the fiscal year.
During fiscal 2013, management approved a plan to sell land, building and other assets located in Waltham, Massachusetts (the "Waltham property assets") with a total carrying amount of $47.4 million. As of May 31, 2013, we classified the Waltham property assets as held for sale at $23.6 million representing their fair value, net of estimated costs to sell which was the lesser of the fair value less cost to sell or carrying amount of the assets. As a result, we recorded a write-down of $23.8 million during fiscal 2013. In September 2013, we finalized the sale of the Waltham property assets for net proceeds of $24.3 million which approximated the carrying value of the assets at the time of sale.
Also during fiscal 2013, in connection with our Fiscal 2011 Restructuring Plan and Other Restructuring Plans, we recorded $6.3 million associated with termination benefits and closing redundant facilities. We also recorded $3.0 million in net favorable employee termination and facility related adjustments for changes in previous estimates during the fiscal year.
During fiscal 2012, in connection with our Fiscal 2011 Restructuring Plan and Other Restructuring Plans, we recorded $17.4 million associated with termination benefits and closing redundant facilities. We also recorded $20.3 million in net favorable employee termination and facility related adjustments for changes in previous estimates during the fiscal year.
SeeNote 10 of our Notes to Consolidated Financial Statements for further information regarding our restructuring plans.
Amortization of Purchased Intangibles
During the last several years, we have completed a number of business combinations and asset acquisitions. As a result of these acquisitions, we purchased intangible assets that are being amortized over their estimated useful lives ranging from one to fourteen years.
Amortization expense remained stablerelatively consistent during fiscal 20142017 as compared to fiscal 2013.2016. The decreases associated with certain fully amortized acquired intangible assets from previous acquisitions were offset by increases associated with intangible assets purchased through our acquisition of TubeMogul in the first quarter of fiscal 2017.
Amortization expense increased 7% during fiscal 20132016 as compared to fiscal 20122015 primarily due to the write-off of certain acquired intangible assets from a previous acquisition and the increase in amortization expense associated with intangible assets purchased through our acquisitions of Behance and Neolane in fiscal 2013.2016.
Non-Operating Income (Expense), Net (dollars in millions)
| | | | | Fiscal
2014 | | Fiscal
2013 | | Fiscal
2012 | | % Change 2014-2013 | | % Change 2013-2012 | | Fiscal
2017 | | Fiscal
2016 | | Fiscal
2015 | | % Change 2017-2016 | | % Change 2016-2015 |
| Interest and other income (expense), net | | $ | 7.3 |
| | $ | 4.9 |
| | $ | (3.4 | ) | | 49 | % | | * |
| | $ | 36.4 |
| | $ | 13.5 |
| | $ | 33.9 |
| | 170 | % | | (60 | )% |
| Percentage of total revenue | | ** |
| | ** |
| | ** |
| | | | | | ** |
| | ** |
| | ** |
| | | | |
| Interest expense | | (59.7 | ) | | (67.5 | ) | | (67.5 | ) | | (12 | )% | | — | % | | (74.4 | ) | | (70.4 | ) | | (64.2 | ) | | 6 | % | | 10 | % |
| Percentage of total revenue | | (1 | )% | | (2 | )% | | (2 | )% | | | | | | (1 | )% | | (1 | )% | | (1 | )% | | | | |
| Investment gains (losses), net | | 1.1 |
| | (4.0 | ) | | 9.5 |
| | * |
| | * |
| | 7.5 |
| | (1.6 | ) | | 1.0 |
| | * |
| | * |
|
| Percentage of total revenue | | ** |
| | ** |
| | ** |
| | | | | | ** |
| | ** |
| | ** |
| | | | |
| Total non-operating income (expense), net | | $ | (51.3 | ) | | $ | (66.6 | ) | | $ | (61.4 | ) | | (23 | )% | | 8 | % | | $ | (30.5 | ) | | $ | (58.5 | ) | | $ | (29.3 | ) | | (48 | )% | | 100 | % |
_________________________________________
(*) Percentage is not meaningful.
(**) Percentage is less than 1%.
Interest and Other Income (Expense), Net
Interest and other income (expense), net consists primarily of interest earned on cash, cash equivalents and short-term fixed income investments. Interest and other income (expense), net also includes gains and losses on fixed income investments and foreign exchange gains and losses other than any gains recorded to revenue from our hedging Euros, British Pounds and Yen currencies.
Interest and other income (expense), net increased in fiscal 2014 as compared to fiscal 2013 primarily due to decreased foreign currency losses and increased realized gains on fixed income investments. The increases were partially offset by decreased interest income on our investment in lease receivable due to the purchase of the East and West Towers during fiscal 2014. See Note 15 of our Notes to Consolidated Financial Statements for further details regarding our investment in lease receivables.programs.
Interest and other income (expense), net increased in fiscal 20132017 as compared to fiscal 2012 primarily2016 due to decreasedhigher average invested balances and interest rates and a decline in foreign exchange losses.hedging costs.
Interest and other income (expense), net decreased in fiscal 2016 as compared to fiscal 2015 due to a gain on the sale of certain property assets that occurred in fiscal 2015 and an increase in foreign exchange hedging costs, offset in part by an increase in interest income due to higher average invested balances and interest rates.
Interest Expense
Interest expense primarily represents interest associated with our senior notes and interest rate swaps. Interest on our senior notes is payable semi-annually, in arrears, on February 1 and August 1. Floating interest payments on the interest rate swaps are paid monthly. The fixed-rate interest receivable on the swaps is received semi-annually concurrent with the senior notes interest payments.
Interest expense remained relatively stableincreased during fiscal 20132017 as compared to fiscal 2012.2016 primarily due to higher short-term floating interest rates on interest rate swaps.
Interest expense increased during fiscal 2016 as compared to fiscal 2015 primarily due to higher short-term floating interest rates on interest rate swaps and higher average debt balances.
Investment Gains (Losses), Net
Investment gains (losses), net consists principally of realized gains or losses from the sale of marketable equity investments, other-than-temporary declines in the value of marketable and non-marketable equity securities and unrealized holding gains and losses associated with our deferred compensation plan assets (classifiedwhich are classified as trading securities)securities, and gains and losses associated with our direct and indirect investments in privately held companies.
Investment gains (losses), net fluctuated due to the following (in millions):
|
| | | | | | | | | | | | |
| | | Fiscal
2014 | | Fiscal
2013 | | Fiscal
2012 |
| Net gains related to our trading securities | | $ | 1.9 |
| | $ | 3.0 |
| | $ | 1.6 |
|
| Net losses related to our direct and indirect investments in privately held companies | | (0.8 | ) | | — |
| | (0.2 | ) |
| Write-downs due to other-than-temporary declines in value of our marketable and non-marketable equity securities | | — |
| | (7.0 | ) | | (0.1 | ) |
| Gains from sale of marketable equity securities | | — |
| | — |
| | 8.2 |
|
| Total investment gains (losses), net | | $ | 1.1 |
| | $ | (4.0 | ) | | $ | 9.5 |
|
During fiscal 2014, total investment gains (losses), net increased to net gains primarily due to write-downs for other-than-temporary declines in value of our direct investments in privately held companies in fiscal 2013 that did not recur in fiscal 2014, offset in part by a decrease in net gains related to our trading securities.
During fiscal 2013, total investment gains (losses), net decreased to net losses primarily due to a decrease in net realized gains from the sale of marketable equity securities and an increase in write-downs for other-than-temporary declines in value of our direct investments in privately held companies.
Provision for Income Taxes (dollars in millions)
| | | | | Fiscal
2014 | | Fiscal
2013 | | Fiscal
2012 | | % Change 2014-2013 | | % Change 2013-2012 | | Fiscal
2017 | | Fiscal
2016 | | Fiscal
2015 | | % Change
2017-2016 | | % Change
2016-2015 |
| Provision | | $ | 93.0 |
| | $ | 66.2 |
| | $ | 286.0 |
| | 40 | % | | (77 | )% | | $ | 443.7 |
| | $ | 266.4 |
| | $ | 244.2 |
| | 67 | % | | 9 | % |
| Percentage of total revenue | | 2 | % | | 2 | % | | 6 | % | | | | | | 6 | % | | 5 | % | | 5 | % | | | | |
| Effective tax rate | | 26 | % | | 19 | % | | 26 | % | | | | | | 21 | % | | 19 | % | | 28 | % | | | | |
As described in Note 1 of our Notes to Consolidated Financial Statements, we early adopted the updated accounting standard for share-based payment accounting during fiscal 2017. As a result, we recorded deferred tax attributes that we were previously tracking pursuant to the rules that preceded this standard. The deferred tax asset recorded with the adoption was offset by the establishment of a valuation allowance.
Our effective tax rate increased by approximately seventwo percentage points during fiscal 20142017 as compared to fiscal 2013.2016. The increase was primarilypartially related to a one-time tax cost associated with licensing acquired company assets to our trading subsidiaries, offset in part by the recognition of excess tax benefits due to our adoption of new accounting guidance related to stock-based compensation and the expirationcompletion of certain income tax examinations. In addition to the federal research and development tax credit in December 2013 and stronger domestic profits for fiscal 2014.
Ourabove noted items, the effective tax rate decreased by approximately seven percentage points duringfor fiscal 2013 as compared to fiscal 2012. The decrease is primarily related to the reinstatement of the U.S. research and development credit and2016 included tax benefits recognized as a result of the completion of certain income tax examinations.examinations, and to a lesser extent, a one-time tax benefit related to the retroactive reinstatement of the fiscal 2015 U.S. Research and Development credit.
In December 2014,
Our effective tax rate decreased by approximately nine percentage points during fiscal 2016 as compared to fiscal 2015. The decrease was primarily due to tax benefits recognized as a result of the United States Congress passed ancompletion of certain income tax examinations and the permanent extension of the federal researchU.S. Research and developmentDevelopment credit for 2015 and onward. The reinstatement of the credit was retroactive to January 1, 2015. A tax benefit for the credit through December 31, 2014. As a result, we expect that our income tax provision forrelating to fiscal 2015 was reflected in its entirety in the first quarter of fiscal 2016. The decrease was partially offset by stronger domestic profits for fiscal 2016. In addition, the fiscal 2015 will include a discrete tax benefit which will reduce our effective tax rate included one-time tax costs associated with licensing acquired company assets to Adobe’s trading companies, offset by tax benefits for the quartertemporary reinstatement of the U.S. Research and to a lesser extent the effective annual tax rate.Development credit in December 2014.
We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant portion of our foreign earnings for the current fiscal year werewas earned by our Irish subsidiaries. In addition to providing for U.S. income taxes on earnings from the U.S.,United States, we provide for U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the U.S.United States. While we do not anticipate changing our intention regarding permanently reinvested earnings as of the balance sheet date, if certain foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings. Currently, there areis a significant amount of foreign earnings upon which U.S. income taxes have not been provided.
Accounting for Uncertainty in Income Taxes
The gross liabilityliabilities for unrecognized tax benefits at November 28, 2014 was $148.8 million, exclusive ofexcluding interest and penalties. If the total unrecognized tax benefits at November 28, 2014penalties were $172.9 million, $178.4 million and $258.7 million for fiscal 2017, 2016 and 2015, respectively, of which, $135.0 million, $144.5 million and $220.2 million if recognized, in the future, $136.2 million of unrecognized tax benefits would decrease theaffect our effective tax rate,rates for fiscal 2017, 2016 and 2015, respectively, which iswere net of anthe estimated $12.6$37.9 million, $33.9 million and $38.5 million federal benefitbenefits related to deducting certain payments on future federal and state tax returns.returns for fiscal 2017, 2016 and 2015, respectively.
As of November 28, 2014, the
The combined amount of accrued interest and penalties related to tax positions taken on our tax returns waswere approximately $14.6 million. This amount is$23.6 million and $22.4 million for fiscal 2017 and 2016, respectively. These amounts were included in non-current income taxes payable.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
current and non-current assets, liabilities and liabilities.income taxes payable. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from $0 to approximately $5$40 million.
In July 2013, a U.S. income tax examination covering fiscal 2008 and 2009 was completed. Our accrued tax and interest related to these years was $48.4 million and was previously reported in long-term income taxes payable. We settled the tax obligation resulting from this examination with cash and income tax assets totaling $41.2 million, and the resulting $7.2 million income tax benefit was recorded in the third quarter of fiscal 2013.
LIQUIDITY AND CAPITAL RESOURCES
This data should be read in conjunction with our Consolidated Statements of Cash Flows. | | | | As of | As of |
| (in millions) | November 28, 2014 | | November 29, 2013 | December 1, 2017 | | December 2, 2016 |
| Cash and cash equivalents | $ | 1,117.4 |
| | $ | 834.6 |
| $ | 2,306.1 |
| | $ | 1,011.3 |
|
| Short-term investments | $ | 2,622.1 |
| | $ | 2,339.2 |
| $ | 3,513.7 |
| | $ | 3,750.0 |
|
| Working capital | $ | 2,107.9 |
| | $ | 2,520.3 |
| $ | 3,720.4 |
| | $ | 3,028.1 |
|
| Stockholders’ equity | $ | 6,775.9 |
| | $ | 6,724.6 |
| $ | 8,459.9 |
| | $ | 7,424.8 |
|
A summary of our cash flows is as follows: | | | (in millions) | Fiscal
2014 | | Fiscal
2013 | | Fiscal
2012 | Fiscal
2017 | | Fiscal
2016 | | Fiscal
2015 |
| Net cash provided by operating activities | $ | 1,287.5 |
| | $ | 1,151.7 |
| | $ | 1,499.6 |
| $ | 2,912.9 |
| | $ | 2,199.7 |
| | $ | 1,469.5 |
|
| Net cash used for investing activities | (490.7 | ) | | (1,177.8 | ) | | (834.7 | ) | (442.9 | ) | | (960.0 | ) | | (1,488.4 | ) |
| Net cash used for financing activities | (507.3 | ) | | (559.1 | ) | | (234.7 | ) | (1,183.7 | ) | | (1,090.7 | ) | | (200.7 | ) |
| Effect of foreign currency exchange rates on cash and cash equivalents | (6.7 | ) | | (5.2 | ) | | 5.4 |
| 8.5 |
| | (14.2 | ) | | (21.2 | ) |
| Net increase (decrease) in cash and cash equivalents | $ | 282.8 |
| | $ | (590.4 | ) | | $ | 435.6 |
| $ | 1,294.8 |
| | $ | 134.8 |
| | $ | (240.8 | ) |
Our primary source of cash is receipts from revenue. The primary uses of cash are payroll related expenses, general operating expenses including marketing, travel and office rent, and cost of revenue. Other sources of cash are proceeds from the exercise of employee options and participation in the employee stock purchase plan. Other uses of cash include our stock repurchase program, which is described below, business acquisitions and purchases of property and equipment.
Cash Flows from Operating Activities
For fiscal 2014,2017, net cash provided by operating activities of $1.3$2.91 billion was primarily comprised of net income plus the net effect of non-cash items. The primary working capital sources of cash were net income coupled with increases in deferred revenue and accrued expenses. The increase in deferred revenue iswas primarily due to increased subscription and ETLA activitysubscriptions for our individual, team and enterprise Creative Cloud offerings and increases in Digital Marketing hosted services. The increase in accrued expenses is primarily due to the increase in accruals for compensation costs and Digital Publishing hosted services, offsetemployee benefits driven by headcount growth, and increased accrued media costs associated with our Advertising Cloud offerings, including TubeMogul. The primary working capital uses of cash were increases in trade receivables, payments of trade payables assumed as part by decreasesof the TubeMogul acquisition, and a decrease in billings for our maintenance and Creative product software upgrade plans which we discontinued in January 2013. Accrued expensesincome taxes payable. Trade receivables increased primarily due to accruals for contract terminationsrevenue linearity, higher revenue levels, and employee transition payments associated with business realignment initiatives implementedincreased media rebill receivables attributable to TubeMogul. Income taxes payable decreased primarily due to taxes paid in excess of the fourth quarter of fiscal 2014.tax provision increase.
For fiscal 2013,2016, net cash provided by operating activities of $1.2$2.20 billion was primarily comprised of net income plus the net effect of non-cash items. The primary working capital sources of cash were net income coupled with increases in deferred revenue and accrued expenses and decreasesexpenses. The increase in trade receivables. Deferreddeferred revenue increasedwas primarily due to increased subscription and ETLA activitysubscriptions for our Creative Cloud offeringofferings and increases in Digital Marketing hosted services, offsetservices. The increase in part by decreases in billings for our maintenance and Creative product software upgrade plans which we discontinued in January 2013. Accruedaccrued expenses increasedis primarily due to amounts due under our fiscal 2013 annual incentive planthe increase in accruals for compensation costs and sales commission accruals associated with higher achievement levels. Trade receivables declined primarily due to lower perpetual license revenue levels and improved collections compared toemployee benefits driven by the fourth quarter of fiscal 2012.
increase in headcount. The primary working capital uses of cash were decreasesincreases in taxes payable and increases intrade receivables, prepaid expenses and other assets. Thecurrent assets, and a decrease in income taxes payable is largely attributedpayable. Trade receivables increased primarily due to tax payments made combined with audit settlement adjustments, offset in part by tax expense and other adjustments during fiscal 2013.higher revenue levels. Prepaid expenses and other current assets increased
primarily due to
increases in short-term income advanced tax receivables related to the carryback of R&D and foreign tax creditspayments made in the fourth quarter of fiscal 2013.2016. Income taxes payable decreased primarily due to the completion of certain income tax audits in fiscal 2016, offset in part by increases to the tax provision in excess of taxes paid.
For fiscal 2012,2015, net cash provided by operating activities of $1.5$1.47 billion was primarily comprised of net income plus the net effect of non-cash items. The primary working capital sources of cash were net income coupled with increases in deferred revenue, income taxes payable and decreasestrade payables. The increase in trade receivables. Deferreddeferred revenue was primarily due to increased subscriptions for our team, individual and enterprise Creative Cloud offerings and increases in Digital Marketing hosted services. The increase in income taxes payable was primarily due to higher taxable income levels during fiscal 2015. Trade payables increased primarily due to an increase in activity for both upgrade plans with support and site and term licenses largely associated with our Digital Media and Digital Marketing enterprise license agreements. The decrease in trade receivables is primarily relatedthe timing of payments to an increase in revenue linearity and improved collections in our Digital Marketing portfolio offset in part by higher revenue levels due to the CS6 product release which occurred lateweb services vendors as certain invoices were received in the second quarterfinal weeks of fiscal 2012.
2015. The primary working capital uses of cash were decreasesincreases in accrued restructuring and trade payables. Decreases in accrued restructuring primarily related to payments and adjustments for employee terminations and facility exit costs associated with the Fiscal 2011 Restructuring Plan, a significant portion ofreceivables which were paid and adjusted in the first and second quarters of fiscal 2012. Trade payables decreased primarilyprincipally due to the timing of payments as a greater number of invoices were paid prior to the fiscal year end in fiscal 2012 as compared to fiscal 2011.higher revenue levels.
Cash Flows from Investing Activities
For fiscal 2014,2017, net cash used for investing activities of $490.7$442.9 million was primarily due to purchases of short-term investments and our acquisition of TubeMogul. Other uses of cash included purchases of property and equipment, including the Almaden Tower and a businesslong-term investments and other assets. These cash outflows were offset in part by sales and maturities of short-term investments.
For fiscal 2016, net cash used for investing activities of $960.0 million was primarily due to purchases of short-term investments. Other uses of cash represented purchases of property and equipment, purchases of long-term investments and other assets, and an immaterial acquisition. These cash outflows were offset in part by sales and maturities of short-term investments.
For fiscal 2013,2015, net cash used for investing activities of $1,177.8 million$1.49 billion was primarily due to purchases of short-term investments and our acquisitionsacquisition of Neolane and Behance.Fotolia. Other uses of cash during fiscal 20132015 represented purchases of short-term investments, purchases of property and equipment associated with our construction projects in Oregon and Indialong-term investments and purchases of long-term technology licenses.other assets. These cash outflows were offset in part by sales and maturities of short-term investments and proceeds received from the sale of the Waltham Property. certain property assets.
See Note 2 and Note 6 of our Notes to the Consolidated Financial Statements for furthermore detailed information regarding our acquisitions of Neolane and Behance. For fiscal 2012, net cash used for investing activities of $834.7 million was primarily due to our acquisition of Efficient Frontier in the first quarter of fiscal 2012. Other uses of cash during fiscal 2012 represented purchases of short-term investments and property and equipment, offset in part by sales and maturities of short-term investments. See Note 2 of our Notes to the Consolidated Financial Statements for further information regarding our acquisition of Efficient Frontier.Almaden Tower purchase, respectively.
Cash Flows from Financing Activities
For fiscal 2014, fiscal 2013 and fiscal 2012,2017, net cash used for financing activities of $507.3 million, $559.1 million and $234.7 million, respectively,$1.18 billion was primarily due to payments for our treasury stock repurchases and costs associated with the issuance of treasury stock, offset in part by proceeds from the issuance of treasury stock.
For fiscal 2016, net cash used for financing activities of $1.09 billion was primarily due to payments for our treasury stock repurchases and costs associated with the issuance of treasury stock, offset in part by proceeds from the issuance of treasury stock and excess tax benefits from stock-based compensation.
In January 2015, we issued $1 billion of 3.25% senior notes due February 1, 2025 (the “2025 Notes”). Our proceeds were approximately $989.3 million which is net of an issuance discount of $10.7 million. In addition, we incurred issuance costs of $7.9 million. Both the discount and issuance costs are being amortized to interest expense over the term of the 2025 Notes using the effective interest method. The 2025 Notes rank equally with our other unsecured and unsubordinated indebtedness.
In addition to the 2025 Notes issuance and 2015 Notes repayment, other financing activities during fiscal 2015 included payments for our treasury stock repurchases and costs associated with the issuance of treasury stock, offset in part by proceeds from the issuance of treasury stock and excess tax benefits from stock-based compensation. See the section titled “Stock Repurchase Program” discussed below.
We expect to continue our investing activities, including short-term and long-term investments, venture capital, 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.
In December 2014, we entered into a definitive agreement under which we expect to acquire Fotolia for approximately $800 million in cash. We expect to finance the acquisition using existing cash, cash equivalents and short-term investment balances, newly issued debt or drawings from our existing revolving credit agreement. We believe that these resources, in addition to cash generated from operations, will be sufficient to fund the acquisition. See Note 2 of our Notes to the Consolidated Financial Statements for further information regarding our acquisition of Fotolia.
Restructuring
During the past several years, we have initiated various restructuring plans. Currently, the Fiscal 2014 Restructuring Plan is the only plan of significance to us as we consider our restructuring plans initiated in prior years to be substantially complete.
As of November 28, 2014, we have accrued total restructuring charges of $22.3 million of which approximately $15.0 million relates to ongoing termination benefits that are expected to be paid during fiscal 2015. The remaining $7.3 million relates to the cost of closing redundant facilities and are expected to be paid under contract through fiscal 2021 of which approximately 45% will be paid through 2016. During fiscal 2014, we made payments related to our restructuring plans totaling $11.0 million
which consisted of $5.7 million and $5.3 million in payments related to termination benefits and contract terminations and the closing of redundant facilities, respectively.
As of November 29, 2013, we accrued total restructuring charges of $13.9 million of which approximately $11.7 million related to cost of closing redundant facilities. The remaining accrued restructuring charges of $2.2 million related to the cost of termination benefits and contract terminations. During fiscal 2013, we made payments related to the above restructuring plans totaling $10.3 million which consisted of $1.3 million and $9.0 million in payments related to termination benefits and contract terminations and the closing of redundant facilities, respectively.
As of November 30, 2012, we accrued total restructuring charges of $21.6 million of which $2.3 million related to ongoing termination benefits and contract terminations. The remaining accrued restructuring charges of $19.3 million related to the cost of closing redundant facilities. During fiscal 2012, we made payments related to restructuring plans totaling $63.1 million which consisted of $50.5 million and $12.6 million in payments related to termination benefits and contract terminations and the closing of redundant facilities, respectively.
We believe that our existing cash and cash equivalents, short-term investments and cash generated from operations will be sufficient to meet the cash outlays for the restructuring actions described above.
See Note 10 of our Notes to Consolidated Financial Statements for additional information regarding our restructuring plans.
Other Liquidity and Capital Resources Considerations
Our existing cash, cash equivalents and investment balances may fluctuate during fiscal 20152018 due to changes in our planned cash outlay, including changes in incremental costs such as direct and integration costs related to our acquisitions. Our cash and
investments totaled $3.7$5.82 billion as of November 28, 2014December 1, 2017. Of this amount, approximately 80%89% was held by our foreign subsidiaries and subject to material repatriation tax effects. OurAs of our balance sheet date, our intent is to permanently reinvest a significant portion of our earnings from foreign operations, and current plans do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. In the event funds from foreign operations are needed to fund operations in the United States and if U.S. tax has not already been previously provided, we would provide for and pay additional U.S. taxes in connection with repatriating these funds.
Subsequent to December 1, 2017, the “Tax Cuts and Jobs Act” (the “Act”) was enacted and included broad tax reforms that are applicable to Adobe. Under the provisions of the Act, the U.S. corporate tax rate decreased from 35% to 21% effective January 1, 2018, our undistributed foreign earnings amount of approximately $4 billion are subject to taxation in fiscal 2018 and are available for repatriation, and our future foreign earnings are subject to U.S. taxation. These changes will require us to remeasure our deferred tax assets and liabilities and reclassify approximately $380 million of deferred tax liabilities related to undistributed foreign earnings to long-term income taxes payable due over eight years. In addition, based on preliminary estimates, we anticipate a tax provision charge of approximately $85 million in fiscal 2018 predominately due to the taxation of undistributed foreign earnings.
Cash from operations could also be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part I, Item 1A titled “Risk Factors”.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.
On March 2, 2012, we entered into a five-year $1.0$1 billion senior unsecured revolving credit agreement (the “Credit Agreement”), providing for loans to us and certain of our subsidiaries. On March 1, 2013, we exercised our option under the Credit Agreement to extend the maturity date of the Credit Agreement by one year to March 2, 2018. On July 27, 2015, we entered into an amendment to further extend the maturity date of the Credit Agreement to July 27, 2020 and reallocated the facility among the syndicate of lenders that are parties to the Credit Agreement. As of November 28, 2014,December 1, 2017, there were no outstanding borrowings under this Credit Agreement and the entire $1.0$1 billion credit line remains available for borrowing.
As of November 28, 2014,December 1, 2017, the amount outstanding under our senior notes was $1.5$1.9 billion, consisting of $600 million of 3.25% senior notes due February 1, 2015 (the “2015 Notes”) and $900 million of 4.75% senior notes due February 1, 2020 (the “2020 Notes”). During and $1 billion of 3.25% senior notes due February 1, 2025 (together with the first quarter of fiscal 2014, we reclassified $599.8 million as current debt on our Consolidated Balance Sheets, which represented2020 Notes, the 2015 Notes, net of unamortized original issuance discount. We intend to refinance the current portion of our debt on or before the due date using either newly issued debt or drawings from our existing revolving credit agreement.“Notes”).
In anticipation of this refinancing, we entered into an interest rate lock agreement with a large financial institution subsequent to November 28, 2014, which fixed a benchmarkOur short-term investment portfolio is primarily invested in corporate bonds and commercial paper, U.S. Treasury rate for an aggregate notional amount of $600.0 million. This derivative agreement hedges the impact on future interest payments attributable to changes in the benchmark interest ratesecurities, foreign government securities, municipal securities and will be terminated upon the debt issuance.
asset-backed securities. We use professional investment management firms to manage a large portion of our invested cash. External investment firms managed, on average, 82% of our consolidated invested balances during fiscal 2014. The fixed income portfolio is primarily invested in corporate bonds and commercial paper, foreign government securities, money market mutual funds, municipal securities, U.S. agency securities and U.S. Treasury securities.
Stock Repurchase Program
We are currently repurchasing common stock underTo facilitate our $2.0 billion authority granted by our Board of Directors in April 2012.
Subsequent to November 28, 2014, as part of our $2.0 billion stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we enteredmay repurchase shares in the open market or enter into a structured stock repurchase agreementagreements with a large financial institution whereupon we provided them with a prepayment of $200.0 million. This amount will be classified as treasury stock onthird parties. In January 2017, our Consolidated Balance Sheets. Upon completion of the $200.0 million stock repurchase agreement, there is no remaining balance under our current authority.
Subsequent to November 28, 2014, the Board of Directors approved a new stock repurchase program granting the companyus authority to repurchase up to $2.0$2.5 billion in common stock through the end of fiscal 2017. The new stock repurchase program approved by our Board of Directors is similar to our previous $2.0 billion stock repurchase program.2019.
During fiscal 2014, 20132017, 2016 and 2012,2015, we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling $600.0 million, $1.1$1.10 billion, $1.08 billion, and $405.0$625 million, respectively. The $600.0 million and $1.1 billion prepayments during fiscal 2014 and 2013, respectively, were under the $2.0 billion stock repurchase authority. Of the $405.0 million of prepayments during fiscal 2012, $100.0 million were under the $2.0 billion stock repurchase program and the remaining $305.0 million were under our previous $1.6 billion stock repurchase authority. 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 higher than our estimate of 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 fiscal 2014,2017, we repurchased approximately 10.98.2 million shares at an average price per share of $63.48$134.20 through structured repurchase agreements entered into during fiscal 2014.2017 and fiscal 2016. During fiscal 2013,2016, we repurchased approximately 21.610.4 million shares at an average price per share of $46.47$97.16 through structured repurchase agreements entered into during fiscal 20132016 and fiscal 2012.2015. During fiscal 2012,2015, we repurchased approximately 11.58.1 million shares at an average price per share of $32.29$77.38 through structured repurchase agreements entered into during fiscal 2012.2015 and fiscal 2014.
For fiscal 2014, 20132017, 2016 and 2012,2015, the prepayments were classified as treasury stock on our Consolidated Balance Sheets at the payment date, though only shares physically delivered to us by November 28, 2014, November 29, 2013December 1, 2017, December 2, 2016 and November 30, 201227, 2015 were excluded from the computation of earnings per share. As of November 28, 2014, $40.3December 1, 2017, $101.5 million of prepayments remained under the agreement.See Note 13
Subsequent to December 1, 2017, as part of our Notes to Consolidated Financial Statements for further discussion of ourthe 2017 stock repurchase programs.authority, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $300 million. This amount will be classified as treasury stock on our Consolidated Balance Sheets. Upon completion of the $300 million stock repurchase agreement, $1.6 billion remains under our current authority.
Summary of Stock Repurchases for Fiscal 20142017, 20132016 and 20122015
(in thousands, except average amounts)
| | Board Approval Date | | Repurchases Under the Plan | | 2014 | | 2013 | | 2012 | | Repurchases Under the Plan (1) | | 2017 | | 2016 | | 2015 |
| | | Shares | | Average | | Shares | | Average | | Shares | | Average | | | Shares | | Average | | Shares | | Average | | Shares | | Average |
| June 2010 | | Structured repurchases(1) | | — |
| | $ | — |
| | — |
| | $ | — |
| | 9,482 |
| | $ | 32.17 |
| |
| April 2012 | | Structured repurchases(1) | | 10,852 |
| | $ | 63.48 |
| | 21,603 |
| | $ | 46.47 |
| | 2,038 |
| | $ | 32.87 |
| | Structured repurchases | | — |
| | $ | — |
| | — |
| | $ | — |
| | 3,255 |
| | $ | 73.83 |
|
| January 2015 | | | Structured repurchases | | 4,263 |
| | $ | 118.00 |
| | 10,428 |
| | $ | 97.16 |
| | 4,849 |
| | $ | 79.76 |
|
| January 2017 | | | Structured repurchases | | 3,923 |
| | $ | 151.80 |
| | — |
| | $ | — |
| | — |
| | $ | — |
|
| Total shares | | | | 10,852 |
| | $ | 63.48 |
| | 21,603 |
| | $ | 46.47 |
| | 11,520 |
| | $ | 32.29 |
| Total shares | | 8,186 |
| | $ | 134.20 |
| | 10,428 |
| | $ | 97.16 |
| | 8,104 |
| | $ | 77.38 |
|
| Total cost | | | | $688,902 | | $1,003,794 | | $371,995 | Total cost | | $1,098,595 | | $1,013,131 | | $627,082 |
_________________________________________
| |
(1) | Stock repurchase agreements executed with large financial institutions. See Stock Repurchase Program above. |
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Contractual Obligations
The following table summarizes our contractual obligations as of November 28, 2014December 1, 2017 (in millions):
| | | | | Payment Due by Period | | Payment Due by Period |
| | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| Notes | | $ | 1,744.9 |
| | $ | 652.5 |
| | $ | 85.5 |
| | $ | 85.5 |
| | $ | 921.4 |
| |
| Notes, including interest | | | $ | 2,250.6 |
| | $ | 75.3 |
| | $ | 1,061.6 |
| | $ | 65.0 |
| | $ | 1,048.7 |
|
| Operating lease obligations | | 202.6 |
| | 42.6 |
| | 67.4 |
| | 46.8 |
| | 45.8 |
| | 525.1 |
| | 57.5 |
| | 120.5 |
| | 95.6 |
| | 251.5 |
|
| Capital lease obligations | | 3.3 |
| | 3.3 |
| | — |
| | — |
| | — |
| |
| Purchase obligations | | 288.9 |
| | 227.9 |
| | 42.2 |
| | 18.8 |
| | — |
| | 695.3 |
| | 449.8 |
| | 245.5 |
| | — |
| | — |
|
| Total | | $ | 2,239.7 |
| | $ | 926.3 |
| | $ | 195.1 |
| | $ | 151.1 |
| | $ | 967.2 |
| | $ | 3,471.0 |
| | $ | 582.6 |
| | $ | 1,427.6 |
| | $ | 160.6 |
| | $ | 1,300.2 |
|
Other
Subsequent to December 1, 2017, we purchased land near our headquarters in San Jose, California for a total purchase price of $68 million.
Senior Notes
In February 2010, we issued $600.0 millionAs of 3.25% seniorDecember 1, 2017, our outstanding notes due February 1, 2015payable consist of the 2020 Notes and $900.0 million2025 Notes with a total carrying value of 4.75% senior notes due February 1, 2020.$1.88 billion. Interest on our senior notes is payable semi-annually, in arrears on February 1 and August 1. At November 28, 2014,December 1, 2017, our maximum commitment for interest payments under the senior notesNotes was $244.9$350.6 million for the remaining duration of our senior notes.Notes. In June of fiscal 2014, we entered into interest rate swaps that effectively converted the fixed interest rate on our 2020 Notes to a floating interest rate based on the London Interbank Offered Rate (“LIBOR”) plus a fixed number of basis points through February 1, 2020.
Capital Lease Obligation
In January 2013, we entered into a sale-leaseback agreement to sell equipment totaling $25.7 million and leaseback the same equipment over a period of 24 months. This transaction was classified as a capital lease obligation and was recorded at fair value.
Covenants
Our credit facility contains a financial covenant requiring us not to exceed a maximum leverage ratio. Our Almaden Tower lease includes certain financial ratios as defined in the lease agreements that are reported to the lessors quarterly. As of November 28, 2014,December 1, 2017, we were in compliance with all of our covenants.this covenant. We believe these covenantsthis covenant will not impact our credit or cash in the coming fiscal year or restrict our ability to execute our business plan. Our senior notesNotes do not contain any financial covenants.
Under the terms of our credit agreement, and lease agreements, we are not prohibited from paying cash dividends unless payment would trigger an event of default or one currently exists. We do not anticipate paying any cash dividends in the foreseeable future.
Accounting for Uncertainty in Income Taxes
The timing of the resolution ofIncome Taxes above for our discussion on accounting for uncertainty in 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 current and non-current 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 $5 million. taxes.
Royalties
We have certain royalty commitments associated with the shipment and licensing of certain offerings and products. Royalty expense is generally based on a dollar amount per unit shippedsold, or a percentage of the underlying revenue.
Indemnifications
In the normal course of business, we provide indemnifications of varying scope to customers 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All market risk sensitive instruments were entered into for non-trading purposes.
Foreign Currency Risk
Foreign Currency Exposures and Hedging Instruments
In countries outside the U.S.,United States, we transact business in U.S. Dollars and various other currencies, which subject us to exposure from movements in exchange rates. We may use foreign exchange purchased options or forward contracts to hedge our foreign currency revenue denominated in Euro, British Pounds and Yen.revenue. Additionally, we hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts. We hedge these exposures to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates.
Our significant foreign currency revenue exposures for fiscal 20142017, 20132016 and 20122015 were as follows (in millions, except Japanese Yen):
| | | | Fiscal
2014 | | Fiscal
2013 | | Fiscal
2012 | Fiscal
2017 | | Fiscal
2016 | | Fiscal
2015 |
| Euro | € | 455.5 |
| | € | 434.7 |
| | € | 530.7 |
| € | 1,044.7 |
| | € | 825.6 |
| | € | 589.6 |
|
| Yen (in billions) | ¥ | 28 |
| | ¥ | 32.5 |
| | ¥ | 34.8 |
| |
| Japanese Yen (in billions) | | ¥ | 51.0 |
| | ¥ | 38.7 |
| | ¥ | 29.7 |
|
| British Pounds | £ | 159.1 |
| | £ | 145.3 |
| | £ | 145.1 |
| £ | 338.4 |
| | £ | 263.5 |
| | £ | 192 |
|
As of November 28, 2014,December 1, 2017, the total absolute value of all outstanding foreign exchange contracts, including options and forwards, was $672.9 million$1.24 billion, which included the notional equivalent of $359.5$618.4 million in Euros, $104.7$225.3 million in British Pounds, $159.5$244.5 million in Japanese Yen and $49.2$148.9 million in other foreign currencies. As of November 28, 2014,December 1, 2017, all contracts were set to expire at various dates through June 2015.2018. The bank counterparties in these contracts could expose us to credit-related losses inthat would be largely mitigated with collateral security agreements that provide for collateral to be received or posted when the eventnet fair value of their nonperformance. However, to mitigate that risk, we only contract with counterparties who meet our minimum requirements under our counterparty risk assessment process.these contracts fluctuates from contractually established thresholds. In addition, our hedging policy establishes maximum limits for each counterparty.we enter into master netting arrangements that have the ability to further limit credit-related losses with the same counterparty by permitting net settlement transactions.
A sensitivity analysis was performed on all of our foreign exchange derivatives as of November 28, 2014.December 1, 2017. This sensitivity analysis measures the hypothetical market value resulting from a 10% shift in the value of exchange rates relative to the U.S. Dollar. For option contracts, the Black-Scholes option pricing model was used. A 10% increase in the value of the U.S. Dollar and a corresponding decrease in the value of the hedged foreign currency asset would lead to an increase in the fair value of our financial hedging instruments by $40.9$79.7 million. Conversely, a 10% decrease in the value of the U.S. Dollar would result in a decrease in the fair value of these financial instruments by $28.9$23.6 million.
As a general rule, we do not use foreign exchange contracts to hedge local currency denominated operating expenses in countries where a natural hedge exists. For example, in many countries, revenue in the local currencies substantially offsets the local currency denominated operating expenses.
We also have long-term investment exposures consisting of the capitalization and retained earnings in our non-U.S. Dollar functional currency foreign subsidiaries. As of November 28, 2014December 1, 2017 and November 29, 2013,December 2, 2016, this long-term investment exposure totaled aan absolute notional equivalent of $161.7$190.5 million and $355.6$70.2 million, respectively. At this time, we do not hedge these long-term investment exposures.
We do not use foreign exchange contracts for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates. We regularly review our hedging program and assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis.
EconomicCash Flow Hedging—Hedges of Forecasted TransactionsForeign Currency Revenue
We may use foreign exchange purchased options or forward contracts to hedge foreign currency revenue denominated in Euros, British Pounds and Japanese Yen. We hedge these cash flow exposures to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. These foreign exchange contracts, carried at fair value, may have maturities between one and twelve months. We enter into these foreign exchange contracts to hedge forecasted revenue in the normal course of business and accordingly, they are not speculative in nature.
We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income (loss) until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to interest and other income, net on our Consolidated Statements of Income at that time. For the fiscal year ended November 28, 2014,December 1, 2017, there were no net gains or losses recognized in other income relating to hedges of forecasted transactions that did not occur were insignificant.
See Note 5 of our Notes to Consolidated Financial Statements for information regarding our hedging activities.occur.
Balance Sheet Hedging—Hedging of Foreign Currency Assets and Liabilities
We hedge exposures related to our net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These foreign exchange contracts are carried at fair value with changes in the fair value recorded as interest and other income, net. These foreign exchange contracts do not subject us to material balance sheet risk due to exchange rate movements because
gains and losses on these contracts are intended to offset gains and losses on the assets and liabilities being hedged. At November 28, 2014,December 1, 2017, the outstanding balance sheet hedging derivatives had maturities of 180 days or less.
Interest Rate Risk
Short-Term Investments and Fixed Income Securities
At November 28, 2014December 1, 2017, we had debt securities classified as short-term investments of $2.6$3.51 billion. Changes in interest rates could adversely affect the market value of these investments. The following table separates these investments, based on stated maturities, to show the approximate exposure to interest rates (in millions):
| | | Due within one year | $ | 607.2 |
| $ | 1,023.7 |
|
| Due within two years | 904.9 |
| |
| Due within three years | 834.2 |
| |
| Due between one and two years | | 1,289.3 |
|
| Due between two and three years | | 812.8 |
|
| Due after three years | 275.3 |
| 387.9 |
|
| Total | $ | 2,621.6 |
| $ | 3,513.7 |
|
A sensitivity analysis was performed on our investment portfolio as of November 28, 2014December 1, 2017. The analysis is based on an estimate of the hypothetical changes in market value of the portfolio that would result from an immediate parallel shift in the yield curve of various magnitudes.
The following tables present the hypothetical fair values of our debt securities classified as short-term investments assuming immediate parallel shifts in the yield curve of 50 basis points (“BPS”), 100 BPS and 150 BPS. The analysis is shown as of November 28, 2014December 1, 2017 and November 29, 2013December 2, 2016 (dollars in millions):
| | | -150 BPS | -150 BPS | | -100 BPS | | -50 BPS | | Fair Value 11/28/14 | | +50 BPS | | +100 BPS | | +150 BPS | -150 BPS | | -100 BPS | | -50 BPS | | Fair Value 12/1/17 | | +50 BPS | | +100 BPS | | +150 BPS |
| 2,663.3 |
| | 2,656.3 |
| | 2,641.9 |
| | 2,621.6 |
| | 2,599.8 |
| | 2,578.0 |
| | 2,556.2 |
| |
| $ | | 3,595.2 |
| | $ | 3,568.1 |
| | $ | 3,540.9 |
| | $ | 3,513.7 |
| | $ | 3,486.5 |
| | $ | 3,459.3 |
| | $ | 3,432.1 |
|
| -150 BPS | -150 BPS | | -100 BPS | | -50 BPS | | Fair Value 11/29/13 | | +50 BPS | | +100 BPS | | +150 BPS | -150 BPS | | -100 BPS | | -50 BPS | | Fair Value 12/2/16 | | +50 BPS | | +100 BPS | | +150 BPS |
| 2,363.7 |
| | 2,360.9 |
| | 2,353.8 |
| | 2,338.5 |
| | 2,320.5 |
| | 2,302.5 |
| | 2,284.5 |
| |
| $ | | 3,828.5 |
| | $ | 3,805.9 |
| | $ | 3,778.4 |
| | $ | 3,750.0 |
| | $ | 3,721.6 |
| | $ | 3,693.2 |
| | $ | 3,664.8 |
|
Senior Notes
As of November 28, 2014December 1, 2017, the amount outstanding under our senior notes was $1.5 billion, consisting of $600 million of 3.25% senior notes due February 1, 2015 (the “2015 Notes”) and $900 million of 4.75% senior notes due February 1, 2020 (the
“2020 Notes” and, together with the 2015 Notes, the “Notes”).$1.9 billion. In June 2014, we entered into interest rate swaps that effectively converted the fixed interest rate on our 2020 Notes to a floating interest rate based on the LIBOR plus a fixed number of basis points through February 1, 2020. Accordingly, our exposure to fluctuations in market interest rates is on the hedged fixed-rate debt of $900 million. An immediate hypothetical 50 basis points increase or decrease in market interest rates would not have a significant impact on our results of operations.
As of November 28, 2014,December 1, 2017, the total carrying amount of the Notes was $1.5$1.88 billion and the related fair value based on inactiveobservable market prices in less active markets was $1.6$1.98 billion.
Other Market Risk
Privately Held Long-Term Investments
The privately held companies in which we invest can still be considered in the start-up or development stages which are inherently risky. The technologies or products these companies have under development are typically in the early stages and may never materialize, which could result in a loss of a substantial part of our initial investment in these companies. The evaluation of privately held companies is based on information that we request from these companies, which is not subject to the same disclosure regulations as U.S. publicly traded companies, and as such, the basis for these evaluations is subject to the timing and accuracy of the data received from these companies.
Marketable Equity Securities
We have minimalimmaterial exposure to equity price risk on our portfoliolong-term investments in privately held companies as these investments were insignificant as of marketable equity securities. As of November 28, 2014December 1, 2017 and November 29, 2013, our total equity holdings in publicly traded companies were insignificant.December 2, 2016.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and Notes thereto.
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
| | | | November 28,
2014 | | November 29,
2013 | December 1,
2017 | | December 2,
2016 |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 1,117,400 |
| | $ | 834,556 |
| $ | 2,306,072 |
| | $ | 1,011,315 |
|
| Short-term investments | 2,622,091 |
| | 2,339,196 |
| 3,513,702 |
| | 3,749,985 |
|
| Trade receivables, net of allowances for doubtful accounts of $7,867 and $10,228, respectively | 591,800 |
| | 599,820 |
| |
| Deferred income taxes | 95,279 |
| | 102,247 |
| |
| Trade receivables, net of allowances for doubtful accounts of $9,151 and $6,214, respectively | | 1,217,968 |
| | 833,033 |
|
| Prepaid expenses and other current assets | 175,758 |
| | 170,110 |
| 210,071 |
| | 245,441 |
|
| Total current assets | 4,602,328 |
| | 4,045,929 |
| 7,247,813 |
| | 5,839,774 |
|
| Property and equipment, net | 785,123 |
| | 659,774 |
| 936,976 |
| | 816,264 |
|
| Goodwill | 4,721,962 |
| | 4,771,981 |
| 5,821,561 |
| | 5,406,474 |
|
| Purchased and other intangibles, net | 469,662 |
| | 605,254 |
| 385,658 |
| | 414,405 |
|
| Investment in lease receivable | 80,439 |
| | 207,239 |
| — |
| | 80,439 |
|
| Other assets | 126,315 |
| | 90,121 |
| 143,548 |
| | 139,890 |
|
| Total assets | $ | 10,785,829 |
| | $ | 10,380,298 |
| $ | 14,535,556 |
| | $ | 12,697,246 |
|
| | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
| Current liabilities: | |
| | |
| |
| | |
|
| Trade payables | $ | 68,377 |
| | $ | 62,096 |
| $ | 113,538 |
| | $ | 88,024 |
|
| Accrued expenses | 683,866 |
| | 656,939 |
| 993,773 |
| | 739,630 |
|
| Debt and capital lease obligations | 603,229 |
| | 14,676 |
| |
| Accrued restructuring | 17,120 |
| | 6,171 |
| |
| Income taxes payable | 23,920 |
| | 10,222 |
| 14,196 |
| | 38,362 |
|
| Deferred revenue | 1,097,923 |
| | 775,544 |
| 2,405,950 |
| | 1,945,619 |
|
| Total current liabilities | 2,494,435 |
| | 1,525,648 |
| 3,527,457 |
| | 2,811,635 |
|
| Long-term liabilities: | |
| | |
| | | |
| Debt and capital lease obligations | 911,086 |
| | 1,499,297 |
| 1,881,421 |
| | 1,892,200 |
|
| Deferred revenue | 57,401 |
| | 53,268 |
| 88,592 |
| | 69,131 |
|
| Accrued restructuring | 5,194 |
| | 7,717 |
| |
| Income taxes payable | 125,746 |
| | 132,545 |
| 173,088 |
| | 184,381 |
|
| Deferred income taxes | 342,315 |
| | 375,634 |
| 279,941 |
| | 217,660 |
|
| Other liabilities | 73,747 |
| | 61,555 |
| 125,188 |
| | 97,404 |
|
| Total liabilities | 4,009,924 |
| | 3,655,664 |
| 6,075,687 |
| | 5,272,411 |
|
| | | | | | | |
| Commitments and contingencies |
|
| |
|
|
|
| |
|
|
| | | | | | | |
| Stockholders’ equity: | |
| | |
| |
| | |
|
| Preferred stock, $0.0001 par value; 2,000 shares authorized; none issued | — |
| | — |
| — |
| | — |
|
Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 497,484 and 496,261 shares outstanding, respectively | 61 |
| | 61 |
| |
Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued;
491,262 and 494,254 shares outstanding, respectively | | 61 |
| | 61 |
|
| Additional paid-in-capital | 3,778,495 |
| | 3,392,696 |
| 5,082,195 |
| | 4,616,331 |
|
| Retained earnings | 6,924,294 |
| | 6,928,964 |
| 9,573,870 |
| | 8,114,517 |
|
| Accumulated other comprehensive income (loss) | (8,094 | ) | | 46,103 |
| (111,821 | ) | | (173,602 | ) |
| Treasury stock, at cost (103,350 and 104,573 shares, respectively), net of reissuances | (3,918,851 | ) | | (3,643,190 | ) | |
| Treasury stock, at cost (109,572 and 106,580 shares, respectively), net of reissuances | | (6,084,436 | ) | | (5,132,472 | ) |
| Total stockholders’ equity | 6,775,905 |
| | 6,724,634 |
| 8,459,869 |
| | 7,424,835 |
|
| Total liabilities and stockholders’ equity | $ | 10,785,829 |
| | $ | 10,380,298 |
| $ | 14,535,556 |
| | $ | 12,697,246 |
|
See accompanying Notes to Consolidated Financial Statements.
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
| | | | Years Ended | Years Ended |
| | November 28,
2014 | | November 29,
2013 | | November 30,
2012 | December 1,
2017 | | December 2,
2016 | | November 27,
2015 |
| Revenue: | | | | | | | | | | |
| Products | $ | 1,627,803 |
| | $ | 2,470,098 |
| | $ | 3,342,843 |
| |
| Subscription | 2,076,584 |
| | 1,137,856 |
| | 673,206 |
| $ | 6,133,869 |
| | $ | 4,584,833 |
| | $ | 3,223,904 |
|
| Product | | 706,767 |
| | 800,498 |
| | 1,125,146 |
|
| Services and support | 442,678 |
| | 447,286 |
| | 387,628 |
| 460,869 |
| | 469,099 |
| | 446,461 |
|
| Total revenue | 4,147,065 |
| | 4,055,240 |
| | 4,403,677 |
| 7,301,505 |
| | 5,854,430 |
| | 4,795,511 |
|
Cost of revenue: | |
| | | | | | | | | |
| Products | 97,099 |
| | 138,154 |
| | 121,663 |
| |
| Subscription | 335,432 |
| | 278,077 |
| | 219,102 |
| 623,048 |
| | 461,860 |
| | 409,194 |
|
| Product | | 57,082 |
| | 68,917 |
| | 90,035 |
|
| Services and support | 189,549 |
| | 170,326 |
| | 143,017 |
| 330,361 |
| | 289,131 |
| | 245,088 |
|
| Total cost of revenue | 622,080 |
| | 586,557 |
| | 483,782 |
| 1,010,491 |
| | 819,908 |
| | 744,317 |
|
Gross profit | 3,524,985 |
| | 3,468,683 |
| | 3,919,895 |
| 6,291,014 |
| | 5,034,522 |
| | 4,051,194 |
|
Operating expenses: | |
| | | | | | | | | |
| Research and development | 844,353 |
| | 826,631 |
| | 742,823 |
| 1,224,059 |
| | 975,987 |
| | 862,730 |
|
| Sales and marketing | 1,652,308 |
| | 1,620,454 |
| | 1,516,159 |
| 2,197,592 |
| | 1,910,197 |
| | 1,683,242 |
|
| General and administrative | 543,332 |
| | 520,124 |
| | 434,982 |
| 624,706 |
| | 576,202 |
| | 533,478 |
|
| Restructuring and other charges | 19,883 |
| | 26,497 |
| | (2,917 | ) | |
| Amortization of purchased intangibles | 52,424 |
| | 52,254 |
| | 48,657 |
| 76,562 |
| | 78,534 |
| | 68,649 |
|
| Total operating expenses | 3,112,300 |
| | 3,045,960 |
| | 2,739,704 |
| 4,122,919 |
| | 3,540,920 |
| | 3,148,099 |
|
Operating income | 412,685 |
| | 422,723 |
| | 1,180,191 |
| 2,168,095 |
| | 1,493,602 |
| | 903,095 |
|
Non-operating income (expense): | |
| | | | | | | | | |
| Interest and other income (expense), net | 7,267 |
| | 4,941 |
| | (3,414 | ) | 36,395 |
| | 13,548 |
| | 33,909 |
|
| Interest expense | (59,732 | ) | | (67,508 | ) | | (67,487 | ) | (74,402 | ) | | (70,442 | ) | | (64,184 | ) |
| Investment gains (losses), net | 1,156 |
| | (4,015 | ) | | 9,504 |
| 7,553 |
| | (1,570 | ) | | 961 |
|
| Total non-operating income (expense), net | (51,309 | ) | | (66,582 | ) | | (61,397 | ) | (30,454 | ) | | (58,464 | ) | | (29,314 | ) |
| Income before income taxes | 361,376 |
| | 356,141 |
| | 1,118,794 |
| 2,137,641 |
| | 1,435,138 |
| | 873,781 |
|
| Provision for income taxes | 92,981 |
| | 66,156 |
| | 286,019 |
| 443,687 |
| | 266,356 |
| | 244,230 |
|
| Net income | $ | 268,395 |
| | $ | 289,985 |
| | $ | 832,775 |
| $ | 1,693,954 |
| | $ | 1,168,782 |
| | $ | 629,551 |
|
| Basic net income per share | $ | 0.54 |
| | $ | 0.58 |
| | $ | 1.68 |
| $ | 3.43 |
| | $ | 2.35 |
| | $ | 1.26 |
|
| Shares used to compute basic net income per share | 497,867 |
| | 501,372 |
| | 494,731 |
| 493,632 |
| | 498,345 |
| | 498,764 |
|
| Diluted net income per share | $ | 0.53 |
| | $ | 0.56 |
| | $ | 1.66 |
| $ | 3.38 |
| | $ | 2.32 |
| | $ | 1.24 |
|
| Shares used to compute diluted net income per share | 508,480 |
| | 513,476 |
| | 502,721 |
| 501,123 |
| | 504,299 |
| | 507,164 |
|
See accompanying Notes to Consolidated Financial Statements.
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | Years Ended | Years Ended |
| | November 28,
2014 | | November 29,
2013 | | November 30,
2012 | December 1,
2017 | | December 2,
2016 | | November 27,
2015 |
| | Increase/(Decrease) | Increase/(Decrease) |
| Net income | $ | 268,395 |
| | $ | 289,985 |
| | $ | 832,775 |
| $ | 1,693,954 |
| | $ | 1,168,782 |
| | $ | 629,551 |
|
| Other comprehensive income, net of taxes: | | | | | | |
| Other comprehensive income (loss), net of taxes: | | | | | | |
| Available-for-sale securities: | | | | | | | | | | |
| Unrealized gains / losses on available-for-sale securities | 2,315 |
| | (2,185 | ) | | 11,297 |
| (2,503 | ) | | (1,618 | ) | | (9,226 | ) |
| Reclassification adjustment for gains / losses on available-for-sale securities recognized | (3,928 | ) | | (3,013 | ) | | (2,874 | ) | |
| Reclassification adjustment for recognized gains / losses on available-for-sale securities | | (947 | ) | | (1,895 | ) | | (2,955 | ) |
| Net increase (decrease) from available-for-sale securities | (1,613 | ) | | (5,198 | ) | | 8,423 |
| (3,450 | ) | | (3,513 | ) | | (12,181 | ) |
| Derivatives designated as hedging instruments: | | | | | | | | | | |
| Unrealized gains / losses on derivative instruments | 41,993 |
| | 34,677 |
| | 23,922 |
| 6,917 |
| | 35,199 |
| | 29,795 |
|
| Reclassification adjustment for gains / losses on derivative instruments recognized | (18,705 | ) | | (35,914 | ) | | (30,672 | ) | |
| Reclassification adjustment for recognized gains / losses on derivative instruments | | (31,973 | ) | | (16,425 | ) | | (55,535 | ) |
| Net increase (decrease) from derivatives designated as hedging instruments | 23,288 |
| | (1,237 | ) | | (6,750 | ) | (25,056 | ) | | 18,774 |
| | (25,740 | ) |
| Foreign currency translation adjustments | (75,872 | ) | | 21,826 |
| | (911 | ) | 90,287 |
| | (19,783 | ) | | (123,065 | ) |
| Other comprehensive income, net of taxes | (54,197 | ) | | 15,391 |
| | 762 |
| |
| Other comprehensive income (loss), net of taxes | | 61,781 |
| | (4,522 | ) | | (160,986 | ) |
| Total comprehensive income, net of taxes | $ | 214,198 |
| | $ | 305,376 |
| | $ | 833,537 |
| $ | 1,755,735 |
| | $ | 1,164,260 |
| | $ | 468,565 |
|
See accompanying Notes to Consolidated Financial Statements.
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| | | | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | |
| | | Shares | | Amount | | Shares | | Amount | | Total | | Shares | | Amount | | Shares | | Amount | | Total |
| Balances at December 2, 2011 | | 600,834 |
| | $ | 61 |
| | $ | 2,753,896 |
| | $ | 6,528,735 |
| | $ | 29,950 |
| | (109,294 | ) | | $ | (3,529,529 | ) | | $ | 5,783,113 |
| |
| Balances at November 28, 2014 | | | 600,834 |
| | $ | 61 |
| | $ | 3,778,495 |
| | $ | 6,924,294 |
| | $ | (8,094 | ) | | (103,350 | ) | | $ | (3,918,851 | ) | | $ | 6,775,905 |
|
| Net income | | — |
| | — |
| | — |
| | 832,775 |
| | — |
| | — |
| | — |
| | 832,775 |
| | — |
| | — |
| | — |
| | 629,551 |
| | — |
| | — |
| | — |
| | 629,551 |
|
Other comprehensive income, net of taxes | | — |
| | — |
| | — |
| | — |
| | 762 |
| | — |
| | — |
| | 762 |
| |
Re-issuance of treasury stock under stock compensation plans | | — |
| | — |
| | — |
| | (358,507 | ) | | — |
| | 14,111 |
| | 527,781 |
| | 169,274 |
| |
Tax detriment from employee stock plans | | — |
| | — |
| | (16,842 | ) | | — |
| | — |
| | — |
| | — |
| | (16,842 | ) | |
| Purchase of treasury stock | | — |
| | — |
| | — |
| | — |
| | — |
| | (11,519 | ) | | (405,000 | ) | | (405,000 | ) | |
Equity awards assumed for acquisition | | — |
| | — |
| | 4,265 |
| | — |
| | — |
| | — |
| | — |
| | 4,265 |
| |
| Stock-based compensation | | — |
| | — |
| | 297,346 |
| | — |
| | — |
| | — |
| | — |
| | 297,346 |
| |
Value of shares in deferred compensation plan | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (511 | ) | | (511 | ) | |
| Balances at November 30, 2012 | | 600,834 |
| | $ | 61 |
| | $ | 3,038,665 |
| | $ | 7,003,003 |
| | $ | 30,712 |
| | (106,702 | ) | | $ | (3,407,259 | ) | | $ | 6,665,182 |
| |
| Net income | | — |
| | — |
| | — |
| | 289,985 |
| | — |
| | — |
| | — |
| | 289,985 |
| |
Other comprehensive income, net of taxes | | — |
| | — |
| | — |
| | — |
| | 15,391 |
| | — |
| | — |
| | 15,391 |
| |
| Other comprehensive income (losses), net of taxes | | | — |
| | — |
| | — |
| | — |
| | (160,986 | ) | | — |
| | — |
| | (160,986 | ) |
Re-issuance of treasury stock under stock compensation plans | | — |
| | — |
| | — |
| | (364,024 | ) | | — |
| | 23,732 |
| | 864,800 |
| | 500,776 |
| | — |
| | — |
| | — |
| | (300,414 | ) | | — |
| | 8,429 |
| | 278,311 |
| | (22,103 | ) |
Tax benefit from employee stock plans | | — |
| | — |
| | 25,290 |
| | — |
| | — |
| | — |
| | — |
| | 25,290 |
| | — |
| | — |
| | 68,133 |
| | — |
| | — |
| | — |
| | — |
| | 68,133 |
|
| Purchase of treasury stock | | — |
| | — |
| | — |
| | — |
| | — |
| | (21,603 | ) | | (1,100,000 | ) | | (1,100,000 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (8,104 | ) | | (625,000 | ) | | (625,000 | ) |
Equity awards assumed for acquisition | | — |
| | — |
| | 1,160 |
| | — |
| | — |
| | — |
| | — |
| | 1,160 |
| | — |
| | — |
| | 677 |
| | — |
| | — |
| | — |
| | — |
| | 677 |
|
| Stock-based compensation | | — |
| | — |
| | 327,581 |
| | — |
| | — |
| | — |
| | — |
| | 327,581 |
| | — |
| | — |
| | 337,578 |
| | — |
| | — |
| | — |
| | — |
| | 337,578 |
|
Value of shares in deferred compensation plan | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (731 | ) | | (731 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,175 | ) | | (2,175 | ) |
| Balances at November 29, 2013 | | 600,834 |
| | $ | 61 |
| | $ | 3,392,696 |
| | $ | 6,928,964 |
| | $ | 46,103 |
| | (104,573 | ) | | $ | (3,643,190 | ) | | $ | 6,724,634 |
| |
| Balances at November 27, 2015 | | | 600,834 |
| | $ | 61 |
| | $ | 4,184,883 |
| | $ | 7,253,431 |
| | $ | (169,080 | ) | | (103,025 | ) | | $ | (4,267,715 | ) | | $ | 7,001,580 |
|
| Net income | | — |
| | — |
| | — |
| | 268,395 |
| | — |
| | — |
| | — |
| | 268,395 |
| | — |
| | — |
| | — |
| | 1,168,782 |
| | — |
| | — |
| | — |
| | 1,168,782 |
|
Other comprehensive income, net of taxes | | — |
| | — |
| | — |
| | — |
| | (54,197 | ) | | — |
| | — |
| | (54,197 | ) | |
| Other comprehensive income (losses), net of taxes | | | — |
| | — |
| | — |
| | — |
| | (4,522 | ) | | — |
| | — |
| | (4,522 | ) |
Re-issuance of treasury stock under stock compensation plans | | — |
| | — |
| |
|
| | (273,065 | ) | | — |
| | 12,075 |
| | 327,231 |
| | 54,166 |
| | — |
| | — |
| | 7,365 |
| | (307,696 | ) | | — |
| | 6,872 |
| | 209,628 |
| | (90,703 | ) |
Tax benefit from employee stock plans | | — |
| | — |
| | 53,225 |
| | — |
| | — |
| | — |
| | — |
| | 53,225 |
| | — |
| | — |
| | 75,102 |
| | — |
| | — |
| | — |
| | — |
| | 75,102 |
|
| Purchase of treasury stock | | | — |
| | — |
| | — |
| | — |
| | — |
| | (10,427 | ) | | (1,075,000 | ) | | (1,075,000 | ) |
| Stock-based compensation | | | — |
| | — |
| | 348,981 |
| | — |
| | — |
| | — |
| | — |
| | 348,981 |
|
Value of shares in deferred compensation plan | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 615 |
| | 615 |
|
| Balances at December 2, 2016 | | | 600,834 |
| | $ | 61 |
| | $ | 4,616,331 |
| | $ | 8,114,517 |
| | $ | (173,602 | ) | | (106,580 | ) | | $ | (5,132,472 | ) | | $ | 7,424,835 |
|
| Net income | | | — |
| | — |
| | — |
| | 1,693,954 |
| | — |
| | — |
| | — |
| | 1,693,954 |
|
| Other comprehensive income (losses), net of taxes | | | — |
| | — |
| | — |
| | — |
| | 61,781 |
| | — |
| | — |
| | 61,781 |
|
Re-issuance of treasury stock under stock compensation plans | | | — |
| | — |
| | 1,768 |
| | (234,601 | ) | | — |
| | 5,194 |
| | 151,058 |
| | (81,775 | ) |
| Purchase of treasury stock | | — |
| | — |
| | — |
| | — |
| | — |
| | (10,852 | ) | | (600,000 | ) | | (600,000 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (8,186 | ) | | (1,100,000 | ) | | (1,100,000 | ) |
Equity awards assumed for acquisition | | — |
| | — |
| | 21 |
| | — |
| | — |
| | — |
| | — |
| | 21 |
| | — |
| | — |
| | 10,348 |
| | — |
| | — |
| | — |
| | — |
| | 10,348 |
|
| Stock-based compensation | | — |
| | — |
| | 332,553 |
| | — |
| | — |
| | — |
| | — |
| | 332,553 |
| | — |
| | — |
| | 453,748 |
| | — |
| | — |
| | — |
| | — |
| | 453,748 |
|
Value of shares in deferred compensation plan | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,892 | ) | | (2,892 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,022 | ) | | (3,022 | ) |
| Balances at November 28, 2014 | | 600,834 |
| | $ | 61 |
| | $ | 3,778,495 |
| | $ | 6,924,294 |
| | $ | (8,094 | ) | | (103,350 | ) | | $ | (3,918,851 | ) | | $ | 6,775,905 |
| |
| Balances at December 1, 2017 | | | 600,834 |
| | $ | 61 |
| | $ | 5,082,195 |
| | $ | 9,573,870 |
| | $ | (111,821 | ) | | (109,572 | ) | | $ | (6,084,436 | ) | | $ | 8,459,869 |
|
See accompanying Notes to Consolidated Financial Statements.
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | Years Ended | Years Ended |
| | November 28,
2014 | | November 29,
2013 | | November 30,
2012 | December 1,
2017 | | December 2,
2016 | | November 27,
2015 |
| Cash flows from operating activities: | | | | | | | | | | |
| Net income | $ | 268,395 |
| | $ | 289,985 |
| | $ | 832,775 |
| $ | 1,693,954 |
| | $ | 1,168,782 |
| | $ | 629,551 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| Depreciation, amortization and accretion | 313,590 |
| | 321,227 |
| | 299,766 |
| 325,997 |
| | 331,535 |
| | 339,473 |
|
| Stock-based compensation | 333,701 |
| | 328,987 |
| | 298,502 |
| 451,451 |
| | 349,912 |
| | 335,859 |
|
| Deferred income taxes | (26,089 | ) | | 29,704 |
| | 89,212 |
| 51,605 |
| | 24,222 |
| | (69,657 | ) |
| Write down of assets held for sale | — |
| | 23,151 |
| | — |
| |
| Gain on the sale of property | | — |
| | — |
| | (21,415 | ) |
| Unrealized (gains) losses on investments | (74 | ) | | 5,665 |
| | (8,535 | ) | (5,494 | ) | | 3,145 |
| | (9,210 | ) |
| Tax benefit (shortfall) from employee stock option plans | 53,225 |
| | 25,290 |
| | (16,841 | ) | |
| Excess tax benefits from stock-based compensation | (53,235 | ) | | (40,619 | ) | | (10,003 | ) | — |
| | (75,105 | ) | | (68,153 | ) |
| Other non-cash items | 1,889 |
| | 5,654 |
| | 4,296 |
| 4,625 |
| | 2,022 |
| | 1,216 |
|
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities: | | | | | | | | | | |
| Trade receivables, net | 7,928 |
| | 33,649 |
| | 45,166 |
| (187,173 | ) | | (160,416 | ) | | (79,502 | ) |
| Prepaid expenses and other current assets | (1,918 | ) | | (55,509 | ) | | 4,552 |
| 28,040 |
| | (71,021 | ) | | (7,701 | ) |
| Trade payables | 6,211 |
| | 7,132 |
| | (62,874 | ) | (45,186 | ) | | (6,281 | ) | | 22,870 |
|
| Accrued expenses | 37,544 |
| | 41,828 |
| | (7,770 | ) | 154,125 |
| | 64,978 |
| | (22,564 | ) |
| Accrued restructuring | 8,871 |
| | (6,949 | ) | | (66,047 | ) | |
| Income taxes payable | 11,006 |
| | (58,875 | ) | | 10,041 |
| (34,493 | ) | | 43,115 |
| | 97,934 |
|
| Deferred revenue | 326,438 |
| | 201,366 |
| | 87,340 |
| 475,402 |
| | 524,840 |
| | 320,801 |
|
| Net cash provided by operating activities | 1,287,482 |
| | 1,151,686 |
| | 1,499,580 |
| 2,912,853 |
| | 2,199,728 |
| | 1,469,502 |
|
| Cash flows from investing activities: | |
| | |
| | | |
| | |
| | |
| Purchases of short-term investments | (2,014,186 | ) | | (2,058,058 | ) | | (1,776,485 | ) | (1,931,011 | ) | | (2,285,222 | ) | | (2,064,833 | ) |
| Maturities of short-term investments | 272,076 |
| | 360,485 |
| | 439,878 |
| 759,737 |
| | 769,228 |
| | 371,790 |
|
| Proceeds from sales of short-term investments | 1,443,577 |
| | 1,449,961 |
| | 1,126,886 |
| 1,393,929 |
| | 860,849 |
| | 1,176,476 |
|
| Acquisitions, net of cash acquired | (29,802 | ) | | (704,589 | ) | | (353,195 | ) | (459,626 | ) | | (48,427 | ) | | (826,004 | ) |
| Purchases of property and equipment | (148,332 | ) | | (188,358 | ) | | (271,076 | ) | (178,122 | ) | | (203,805 | ) | | (184,936 | ) |
| Proceeds from sale of property and equipment | — |
| | 24,260 |
| | — |
| |
| Proceeds from sale of property | | — |
| | — |
| | 57,779 |
|
| Purchases of long-term investments, intangibles and other assets | (17,572 | ) | | (67,737 | ) | | (29,701 | ) | (29,918 | ) | | (58,433 | ) | | (22,779 | ) |
| Proceeds from sale of long-term investments | 3,532 |
| | 6,233 |
| | 29,031 |
| 2,134 |
| | 5,777 |
| | 4,149 |
|
| Net cash used for investing activities | (490,707 | ) | | (1,177,803 | ) | | (834,662 | ) | (442,877 | ) | | (960,033 | ) | | (1,488,358 | ) |
| Cash flows from financing activities: | |
| | |
| | | |
| | |
| | |
| Purchases of treasury stock | (600,000 | ) | | (1,100,000 | ) | | (405,000 | ) | (1,100,000 | ) | | (1,075,000 | ) | | (625,000 | ) |
| Proceeds from issuance of treasury stock | 227,841 |
| | 598,194 |
| | 235,251 |
| 158,351 |
| | 145,697 |
| | 164,270 |
|
| Cost of issuance of treasury stock | (173,675 | ) | | (97,418 | ) | | (65,977 | ) | |
| Taxes paid related to net share settlement of equity awards | | (240,126 | ) | | (236,400 | ) | | (186,373 | ) |
| Excess tax benefits from stock-based compensation | 53,235 |
| | 40,619 |
| | 10,003 |
| — |
| | 75,105 |
| | 68,153 |
|
| Proceeds from debt and capital lease obligations | — |
| | 25,703 |
| | 3,152 |
| |
| Proceeds from debt issuance | | — |
| | — |
| | 989,280 |
|
| Repayment of debt and capital lease obligations | (14,684 | ) | | (25,879 | ) | | (9,855 | ) | (1,960 | ) | | (108 | ) | | (602,189 | ) |
| Debt issuance costs | — |
| | (357 | ) | | (2,297 | ) | — |
| | — |
| | (8,828 | ) |
| Net cash used for financing activities | (507,283 | ) | | (559,138 | ) | | (234,723 | ) | (1,183,735 | ) | | (1,090,706 | ) | | (200,687 | ) |
| Effect of foreign currency exchange rates on cash and cash equivalents | (6,648 | ) | | (5,241 | ) | | 5,357 |
| 8,516 |
| | (14,234 | ) | | (21,297 | ) |
| Net increase (decrease) in cash and cash equivalents | 282,844 |
| | (590,496 | ) | | 435,552 |
| 1,294,757 |
| | 134,755 |
| | (240,840 | ) |
| Cash and cash equivalents at beginning of year | 834,556 |
| | 1,425,052 |
| | 989,500 |
| 1,011,315 |
| | 876,560 |
| | 1,117,400 |
|
| Cash and cash equivalents at end of year | $ | 1,117,400 |
| | $ | 834,556 |
| | $ | 1,425,052 |
| $ | 2,306,072 |
| | $ | 1,011,315 |
| | $ | 876,560 |
|
| Supplemental disclosures: | |
| | | | | |
| | | | |
| Cash paid for income taxes, net of refunds | $ | 20,140 |
| | $ | 129,701 |
| | $ | 201,125 |
| $ | 396,668 |
| | $ | 249,884 |
| | $ | 203,010 |
|
| Cash paid for interest | $ | 68,886 |
| | $ | 64,843 |
| | $ | 66,265 |
| $ | 69,430 |
| | $ | 66,193 |
| | $ | 56,014 |
|
| Non-cash investing activities: | | | | | | | | | | |
| Investment in lease receivable applied to building purchase | $ | 126,800 |
| | $ | — |
| | $ | — |
| $ | 80,439 |
| | $ | — |
| | $ | — |
|
| Issuance of common stock and stock awards assumed in business acquisitions | $ | 21 |
| | $ | 1,160 |
| | $ | 4,265 |
| $ | 10,348 |
| | $ | — |
| | $ | 677 |
|
See accompanying Notes to Consolidated Financial Statements.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Operations
Founded in 1982, Adobe Systems Incorporated is one of the largest and most diversified software companies in the world. We offer a line of products and services used by creative professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing and engaging with compelling content and experiences across multiple operating systems,personal computers, devices and media. We market and license our products and services directly to enterprise customers through our sales force and to end-usersend users through app stores and our own website at www.adobe.com. We offer many of our products via a Software-as-a-Service (“SaaS”) model or a managed services model (both of which are referred to as a hosted or cloud-based model)cloud-based) as well as through term subscription and pay-per-use models. We also distribute certain products and services through a network of distributors, value-added resellers (“VARs”), systems integrators (“SIs”), independent software vendors (“ISVs”), retailers, software developers and original equipment manufacturers (“OEMs”). In addition, we license our technology to hardware manufacturers, software developers and service providers for use in their products and solutions. Our products run on personal and server-based computers, as well as on smartphones, tablets and other devices, depending on the product. We have operations in the Americas, Europe, Middle East and Africa (“EMEA”) and Asia-Pacific (“APAC”).
Basis of Presentation
The accompanying Consolidated Financial Statements include those of Adobe and its subsidiaries, after elimination of all intercompany accounts and transactions. We have prepared the accompanying Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”).
Use of Estimates
In preparing Consolidated Financial Statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC, we must make estimates and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Estimates are used for, but not limited to, sales allowances and programs, bad debts, stock-based compensation, determining the fair value of acquired assets and assumed liabilities, excess inventory and purchase commitments, restructuring charges, facilities lease losses, impairment of goodwill and intangible assets, litigation, income taxes and investments. Actual results may differ materially from these estimates.
Fiscal Year
Our fiscal year is a 52- or 53-week year that ends on the Friday closest to November 30. Fiscal 2014, 2013Our financial results for fiscal 2016 benefited from an extra week in the first quarter of fiscal 2016 due to our 52/53 week financial calendar whereby fiscal 2016 was a 53-week fiscal year compared with fiscal 2017 and 20122015 which were 52-week fiscal years.
ReclassificationReclassifications
Certain immaterial prior year amounts have been reclassified to conform to current year presentation in the Consolidated Balance Sheets, Consolidated Statements of Income and Consolidated Statements of Cash Flows.
Significant Accounting Policies
Revenue Recognition
Our revenue is derived from the subscription, non-software related hosted services, term-based and perpetual licensing of perpetual, time-based, and subscription software products, associated software maintenance and support plans, non-software related hosted services, consulting services, training, and technical support. Most of our enterprise customer arrangements are complex, involving multiple solutions and various license rights, bundled with post-contract customer support and other meaningful rights that together provide a complete end-to-end solution to the customer.
We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Multiple Element Arrangements
We enter into multiple element revenue arrangements in which a customer may purchase a combination of software, upgrades, maintenance and support, hosted services, and consulting.
For our software and software-related multiple element arrangements, we must: (1) determine whether and when each element has been delivered; (2) determine whether undelivered products or services are essential to the functionality of the delivered products and services; (3) determine the fair value of each undelivered element using vendor-specific objective evidence (“VSOE”),; and (4) allocate the total price among the various elements. VSOE of fair value is used to allocate a portion of the price to the undelivered elements and the residual method is used to allocate the remaining portion to the delivered elements. Absent VSOE, revenue is deferred until the earlier of the point at which VSOE of fair value exists for any undelivered element or until all elements of the arrangement have been delivered. However, if the only undelivered element is maintenance and support, the entire arrangement fee is recognized ratably over the performance period. Changes in assumptions or judgments or changes to the elements in a software arrangement could cause a material increase or decrease in the amount of revenue that we report in a particular period.
We determine VSOE for each element based on historical stand-alone sales to third parties or from the stated renewal rate for the elements contained in the initial arrangement. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range.
We have established VSOE for our software maintenance and support services, custom software development services, consulting services and training, when such services are sold optionally with software licenses.
For multiple-element arrangements containing our non-software services, we must: (1) determine whether and when each element has been delivered; (2) determine the fair value of each element using the selling price hierarchy of VSOE of selling price, third-party evidence (“TPE”) of selling price or best-estimated selling price (“BESP”), as applicable; and (3) allocate the total price among the various elements based on the relative selling price method.
For multiple-element arrangements that contain both software and non-software elements, we allocate revenue to software or software-related elements as a group and any non-software elements separately based on the selling price hierarchy. We determine the selling price for each deliverable using VSOE of selling price, if it exists, or TPE of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use BESP. Once revenue is allocated to software or software-related elements as a group, we recognize revenue in conformance with software revenue accounting guidance. Revenue is recognized when revenue recognition criteria are met for each element.
We are generally unable to establish VSOE or TPE for non-software elements and as such, we use BESP. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. We determine BESP for a product or service by considering multiple factors including, but not limited to major product groupings, geographies, market conditions, competitive landscape, internal costs, gross margin objectives and pricing practices. Pricing practices taken into consideration include historic contractually stated prices, volume discounts where applicable and our price lists. We must estimate certain royalty revenue amounts due to the timing of securing information from our customers. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, our assumptions and judgments regarding future products and services as well as our estimates of royalty revenue could differ from actual events, thus materially impacting our financial position and results of operations.
Subscription and Services and Support Revenue
We recognize revenue for hosted services that are priced based on a committed number of transactions, ratably beginning on the date the services associated with the committed transactions are first made available to the customer and continuing through the end of the contractual service term. Over-usage fees, and fees billed based on the actual number of transactions from which we capture data, are billed in accordance with contract terms as these fees are incurred. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenue, depending on whether all revenue recognition criteria have been met.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our services and support revenue is composed of consulting, training, and maintenance and support, primarily related to the licensing of our enterprise, mobile and device products and solutions. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products.
Our consulting revenue is recognized using a time and materials basis and is measured monthly based on input measures, such as hours incurred to date, with consideration given to output measures, such as contract milestones when applicable.
Our maintenance and support offerings, which entitle customers to receive product upgrades and enhancements on a when and if available basis or technical support, depending on the offering, are recognized ratably over the performance period of the arrangement.
Our software subscription offerings, which may include product upgrades and enhancements on a when and if available basis, hosted services, and online storage, are generally offered to our customers over a specified period of time and we recognize revenue associated with these arrangements ratably over the subscription period.
Product Revenue
We recognize our product revenue upon shipment, provided all other revenue recognition criteria have been met. Our desktop application product revenue from distributors is subject to agreements allowing limited rights of return, rebates and price protection. Our direct sales and OEM sales are also subject to limited rights of return. Accordingly, we reduce revenue recognized for estimated future returns, price protection and rebates at the time the related revenue is recorded. The estimates for returns are adjusted periodically based upon historical rates of returns, inventory levels in the distribution channel and other related factors.
We recognize OEM licensing revenue, primarily royalties, when OEMs ship products incorporating our software, provided collection of such revenue is deemed probable. For certain OEM customers, we must estimate royalty revenue due to the timing of securing customer information. This estimate is based on a combination of our generated forecasts and actual historical reporting
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
by our OEM customers. To substantiate our ability to estimate revenue, we review license royalty revenue reports ultimately received from our significant OEM customers in comparison to the amounts estimated in the prior period.
Our product-related deferred revenue includes maintenance upgrade revenue and customer advances under OEM license agreements. Our maintenance upgrade revenue for our desktop application products is included in our product revenue line item as the maintenance primarily entitles customers to receive product upgrades. In cases where we provide a specified free upgrade to an existing product, we defer the fair value for the specified upgrade right until the future obligation is fulfilled or when the right to the specified free upgrade expires.
Subscription and Services and Support Revenue
We recognize revenue for hosted services that are based on a committed number of transactions, ratably beginning on the date the customer commences use of our services and continuing through the end of the customer term. Over-usage fees, and fees billed based on the actual number of transactions from which we capture data, are billed in accordance with contract terms as these fees are incurred. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenue, depending on whether all revenue recognition criteria have been met.
Our services and support revenue is composed of consulting, training and maintenance and support, primarily related to the licensing of our Enterprise and Mobile and Device Solutions products. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products.
Our consulting revenue is recognized using a time and materials basis and is measured monthly based on input measures, such as hours incurred to date, with consideration given to output measures, such as contract milestones when applicable.
Our maintenance and support offerings, which entitle customers to receive product upgrades and enhancements on a when and if available basis or technical support, depending on the offering, are recognized ratably over the performance period of the arrangement.
Our software subscription offerings, which may include product upgrades and enhancements on a when and if available basis, hosted services, and online storage are generally offered to our customers over a specified period of time and we recognize revenue associated with these arrangements ratably over the subscription period.
Rights of Return, Rebates and Price Protection
As discussed above, we offer limited rights of return, rebates and price protection of our products under various policies and programs with our distributors, resellers and/or end-user customers. We estimate and record reserves for these programs as an offset to revenue and accounts receivable. Below is a summary of each of the general provisions in our contracts:
Distributors are allowed limited rights of return of products purchased during the previous quarter. In addition, distributors are allowed to return products that have reached the end of their lives, as defined by us, and products that are being replaced by new versions.
We offer rebates to our distributors, resellers and/or end user customers. The amount of revenue that is reduced for distributor and reseller rebates is based on actual performance against objectives set forth by us for a particular reporting period (volume, timely reporting, etc.). If mail-in or other promotional rebates are offered, the amount of revenue reduced is based on the dollar amount of the rebate, taking into consideration an estimated redemption rate calculated using historical trends.
From time to time, we may offer price protection to our distributors that allow for the right to a credit if we permanently reduce the price of a software product. The amount of revenue that is reduced for price protection is calculated as the difference between the old and new price of a software product on inventory held by the distributor immediately prior to the effective date of the decrease.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Although our subscription contracts are generally non-cancellable, a limited number of customers have the right to cancel their contracts by providing prior written notice to us of their intent to cancel the remainder of the contract term. In the event a customer cancels its contract, they are not entitled to a refund for prior services we have provided to them.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On a quarterly basis, the amount of revenue that is reserved for future returns is calculated based on our historical trends and data specific to each reporting period. We review the actual returns evidenced in prior quarters as a percent of revenue to determine a historical returns rate. We then apply the historical rate to the current period revenue as a basis for estimating future returns. When necessary, we also provide a specific returns reserve for product in the distribution channel in excess of estimated requirements. This estimate can be affected by the amount of a particular product in the channel, the rate of sell-through, product plans and other factors.
Revenue Reserve
Revenue reserve rollforward (in thousands):
| | | | | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
| Beginning balance | | $ | 28,664 |
| | $ | 57,058 |
| | $ | 60,887 |
| | $ | 23,096 |
| | $ | 19,446 |
| | $ | 17,402 |
|
| Amount charged to revenue | | 45,550 |
| | 74,031 |
| | 170,839 |
| | 61,031 |
| | 55,739 |
| | 45,676 |
|
| Actual returns | | (56,812 | ) | | (102,425 | ) | | (174,668 | ) | | (62,121 | ) | | (52,089 | ) | | (43,632 | ) |
| Ending balance | | $ | 17,402 |
| | $ | 28,664 |
| | $ | 57,058 |
| | $ | 22,006 |
| | $ | 23,096 |
| | $ | 19,446 |
|
Deferred Revenue
Deferred revenue consists substantially of billings and payments received in advance of revenue recognition for our products and servicessolutions described above. We recognize deferred revenue as revenue only when the revenue recognition criteria are met.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts which reflects our best estimate of potentially uncollectible trade receivables. The allowance is based on both specific and general reserves. We regularly review our trade receivables allowances by considering such factors as historical experience, credit-worthiness, the age of the trade receivable balances and current economic conditions that may affect a customer’s ability to pay and we specifically reserve for those deemed uncollectible.
| | | (in thousands) | | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
| Beginning balance | | $ | 10,228 |
| | $ | 12,643 |
| | $ | 15,080 |
| | $ | 6,214 |
| | $ | 7,293 |
| | $ | 7,867 |
|
| Increase due to acquisition | | 51 |
| | 1,038 |
| | 325 |
| | 2,391 |
| | 77 |
| | 326 |
|
| Charged to operating expenses | | 603 |
| | 933 |
| | 3,356 |
| | 4,411 |
| | 1,337 |
| | 1,472 |
|
Deductions(1) | | (3,015 | ) | | (4,386 | ) | | (6,118 | ) | | (3,865 | ) | | (2,493 | ) | | (2,372 | ) |
| Ending balance | | $ | 7,867 |
| | $ | 10,228 |
| | $ | 12,643 |
| | $ | 9,151 |
| | $ | 6,214 |
| | $ | 7,293 |
|
________________________________________
| |
(1) | Deductions related to the allowance for doubtful accounts represent amounts written off against the allowance, less recoveries. |
Property and Equipment
We record property and equipment at cost less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over their estimated useful lives ranging from 1 to 5 years for computers and equipment as well as server hardware under capital leases, 1 to 6 years for furniture and fixtures, 5 to 20 years for building improvements and up to 40 years for buildings. Leasehold improvements are amortized using the straight-line method over the lesser of the remaining respective lease term or estimated useful lives ranging from 1 to 15 years.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill, Purchased Intangibles and Other Long-Lived Assets
Goodwill is assigned to one or more reporting segments on the date of acquisition. We review our goodwill for impairment annually during our second quarter of each fiscal year. In performing our goodwill impairment test, we first evaluate goodwill to determine if it is more likely than not that the occurrence of an event or change in circumstances has reduced the fair value of a reporting segment below its carrying value. The qualitative assessment requires that we consider events or circumstances that may include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in the composition or carrying amount of a reporting segments’ net assets, and changes in our stock price. If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of our reporting segments are greater than the carrying amounts, then the two-step goodwill impairment test is not performed.
If the qualitative assessment indicates that the two-step quantitative analysis should be performed, we evaluate goodwill for impairment by comparing the fair value of each of our reporting segments to its carrying value, including the associated goodwill. To determine the fair values, we use the equal weighting of the market approach based on comparable publicly traded companies in similar lines of businesses and the income approach based on estimated discounted future cash flows. Our cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We review our goodwill for impairment annually, or more frequently, if facts and circumstances warrant a review. We completed our annual goodwill impairment test in the second quarter of fiscal 2014.2017. We elected to usedetermined, after performing a qualitative review of each reporting segment, that it is more likely than not that the Step 1 quantitative assessment for our reporting units and determined that there was no impairmentfair value of goodwill. There is no significant risk of material goodwill impairment in anyeach of our reporting units, based uponsegments substantially exceeds the resultsrespective carrying amounts. Accordingly, there was no indication of our annualimpairment, and the two-step quantitative goodwill impairment test.test was not performed.
We amortize intangible assets with finite lives over their estimated useful lives and review them for impairment whenever an impairment indicator exists. We continually monitor events and changes in circumstances that could indicate carrying amounts of our long-lived assets, including our intangible assets may not be recoverable. When such events or changes in circumstances occur, we assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on any excess of the carrying amount over the fair value of the assets. We did not recognize any intangible asset impairment charges in fiscal 20142017, 20132016 or 20122015.
Our
During fiscal 2017, our intangible assets arewere amortized over their estimated useful lives ofranging from 1 to 14 years. Amortization is based on the pattern in which the economic benefits of the intangible asset will be consumed or on a straight-line basis when the consumption pattern is not apparent. The weighted average useful lives of our intangible assets were as follows:
|
| |
| | Weighted Average Useful Life (years) |
| Purchased technology | 65 |
| Customer contracts and relationships | 109 |
| Trademarks | 8 |
| Acquired rights to use technology | 89 |
| Localization | 1 |
| Other intangibles | 35 |
Software Development Costs
Capitalization of software development costs for software to be sold, leased, or otherwise marketed begins upon the establishment of technological feasibility, which is generally the completion of a working prototype that has been certified as having no critical bugs and is a release candidate. Amortization begins once the software is ready for its intended use, generally based on the pattern in which the economic benefits will be consumed. To date, software development costs incurred between completion of a working prototype and general availability of the related product have not been material.
Internal Use Software
We capitalize costs associated with customized internal-use software systems that have reached the application development stage. Such capitalized costs include external direct costs utilized in developing or obtaining the applications and payroll and payroll-related expenses for employees who are directly associated with the development of the applications. Capitalization of such costs begins when the preliminary project stage is complete and ceases at the point in which the project is substantially complete and is ready for its intended purpose.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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. We record a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not.
Taxes Collected from Customers
We net taxes collected from customers against those remitted to government authorities in our financial statements. Accordingly, taxes collected from customers are not reported as revenue.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Treasury Stock
We account for treasury stock under the cost method. When treasury stock is re-issued at a price higher than its cost, the difference is recorded as a component of additional paid-in-capital in our Consolidated Balance Sheets. When treasury stock is re-issued at a price lower than its cost, the difference is recorded as a component of additional paid-in-capital to the extent that there are previously recorded gains to offset the losses. If there are no treasury stock gains in additional paid-in-capital, the losses upon re-issuance of treasury stock are recorded as a componentreduction of retained earnings in our Consolidated Balance Sheets.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses for fiscal 20142017, 20132016 and 20122015 were $87.9$141.7 million, $88.5135.8 million and $99.4113.6 million, respectively.
Foreign Currency Translation
We translate assets and liabilities of foreign subsidiaries, whose functional currency is their local currency, at exchange rates in effect at the balance sheet date. We translate revenue and expenses at the monthly average exchange rates. We include accumulated net translation adjustments in stockholders’ equity as a component of accumulated other comprehensive income.income (loss).
Foreign Currency and Other Hedging Instruments
In countries outside the United States, (“U.S.”), we transact business in U.S. Dollars and in various other currencies. In EuropeWe use foreign exchange option and Japan, transactions that areforward contracts for revenue denominated in Euros, Yen and British Pounds are subject to exposure from movements in exchange rates.and Japanese Yen. We hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. We use foreign exchange option and forward contracts for revenue denominated in Euros, British Pounds and Yen.
We account for our foreign currency hedgingrecognize all derivative instruments as either assets or liabilities on the balance sheetin our Consolidated Balance Sheets and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. Contracts that do not qualify for hedge accounting are adjusted to fair value through earnings. See Note 5 for information regarding our hedging activities. Gains and losses from foreign exchange forward contracts which hedge certain balance sheet positions primarily non-functional currency denominated assets and liabilities (e.g., trade receivables and accounts payable) are recorded each period as a component of interest and other income, net in our Consolidated Statements of Income. Foreign exchange option contracts hedging forecasted foreign currency revenue are designated as cash flow hedges under accounting for derivative instruments and hedging activities, with gains and losses recorded net of tax, as a component of other comprehensive income (“OCI”) in stockholders’ equity and reclassified into revenue at the time the forecasted transactions occur.
Concentration of Risk
Financial instruments that potentially subject us to concentrations of credit risk are short-term fixed-income investments, structured repurchase transactions, contracts hedging foreign currency risk,and interest rate hedge contracts and trade receivables.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our investment portfolio consists of investment-grade securities diversified among security types, industries and issuers. Our cash and investments are held and primarily managed by recognized financial institutions that follow our investment policy. Our policy limits the amount of credit exposure to any one security issue or issuer and we believe no significant concentration of credit risk exists with respect to these investments.
We mitigate concentration of risk related toenter into foreign currency hedges through a policy that establishes counterparty limits. Thehedge contracts with bank counterparties in these contractsthat could expose us to credit-relatedcredit related losses in the event of their nonperformance. However,This is largely mitigated with collateral security agreements that provide for collateral to mitigate that risk, we only contract with counterparties who meet our minimum requirements under our counterparty risk assessment process.be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. In addition, our hedging policy establishes maximum limits for each counterparty. We monitor ratings,we enter into master netting arrangements which have the ability to further limit credit spreads and potential downgrades on at least a quarterly basis. Based on our on-going assessment ofrelated losses with the same counterparty risk, we will adjust our exposure to various counterparties.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The aggregate fair value of foreign currency contracts in net asset positions as of November 28, 2014December 1, 2017 and November 29, 2013December 2, 2016 was $33.0$14.2 million and $11.9$38.1 million respectively. These amounts represent the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted. These exposures could be reduced by up to $0.7 million and $1.1 million, respectively fromcertain immaterial liabilities included in master netting arrangements with those same counterparties.
Credit risk in receivables is limited to OEMs, dealers and distributors of hardware and software products to the retail market, customers to whom we license software directly and our SaaS offerings. We are also experiencing elevated delinquency and bad debt write-offs related to our receivables assumed in business combinations. A credit review is completed for our new distributors, dealers and OEMs. We also perform ongoing credit evaluations of our customers’ financial condition and require letters of credit or other guarantees, whenever deemed necessary. The credit limit given to the customer is based on our risk assessment of their ability to pay, country risk and other factors and is not contingent on the resale of the product or on the collection of payments from their customers. We also purchase credit insurance to mitigate credit risk in some foreign markets where we believe it is warranted. If we license our software or provide SaaS services to a customer where we have a reason to believe the customer’s ability to pay is not probable, due to country risk or credit risk, we will not recognize the revenue. We will revert to recognizing the revenue on a cash basis, assuming all other criteria for revenue recognition has been met.
See Note 18Recently Adopted Accounting Guidance
On March 30, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies various aspects related to the accounting and presentation of share-based payments. The amendments require entities to record all tax effects related to share-based payments at settlement or expiration through the income statement and the windfall tax benefit to be recorded when it arises, subject to normal valuation allowance considerations. Tax-related cash flows resulting from share-based payments are required to be reported as operating activities in the statement of cash flows. The updates relating to the income tax effects of the share-based payments including the cash flow presentation must be adopted either prospectively or retrospectively. Further, the amendments allow the entities to make an accounting policy election to either estimate forfeitures or recognize forfeitures as they occur. If an election is made, the change to recognize forfeitures as they occur must be adopted using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained earnings. The effective date of the new standard for information regarding our significant customers.public companies is for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted.
We deriveearly adopted this standard during the first quarter of fiscal 2017. As required by the standard, excess tax benefits recognized on stock-based compensation expense were reflected in our Consolidated Statements of Income as a significant portioncomponent of our OEM PostScript and Other licensing revenue from a small number of OEMs. Our OEMs on occasion seek to renegotiate their royalty arrangements. We evaluate these requeststhe provision for income taxes rather than paid-in capital on a case-by-caseprospective basis. IfAccordingly, we recorded excess tax benefits within our provision for income taxes, rather than additional paid-in capital upon adoption. The cumulative effect to retained earnings from previously unrecognized excess tax benefits, after offset by the related valuation allowance, was not significant to our Consolidated Balance Sheets.
We also elected to prospectively apply the change in presentation of excess tax benefits wherein excess tax benefits recognized on stock-based compensation expense were classified as operating activities in our Consolidated Statements of Cash Flows for fiscal 2017. Prior period classification of cash flows related to excess tax benefits were not adjusted in our Consolidated Statements of Cash Flows. Presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to all periods presented as such cash flows have historically been presented as financing activities. Further, we did not elect an agreement is not reached, a customer may decideaccounting policy change to pursuerecord forfeitures as they occur and thus we continue to estimate forfeitures at each period.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
There have been no other options, which could result in lower licensing revenue for us.new accounting pronouncements made effective during fiscal 2017 that have significance, or potential significance, to our Consolidated Financial Statements.
Recent Accounting Pronouncements Not Yet Effective
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the full retrospective or cumulative effectmodified retrospective transition method. EarlyIn August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard for periods beginning after December 15, 2016 to December 15, 2017, with early adoption ispermitted but not permitted. Theearlier than the original effective date. Accordingly, the updated standard becomesis effective for us in the first quarter of fiscal 2018.2019. We have not yet selectedexpect to adopt this updated standard in the first quarter of fiscal 2019 on a transition method and wemodified retrospective basis. We are currently evaluating the effect that the updated standard will have on our consolidatedConsolidated Financial Statements and related disclosures.
While we are continuing to assess all potential impacts of the new standard, we currently believe that the most significant impact relates to our accounting for arrangements that include on-premise term-based software licenses bundled with maintenance and support. Under current GAAP, the revenue attributable to these software licenses is recognized ratably over the term of the arrangement because VSOE does not exist for the undelivered maintenance and support element as it is not sold separately. The requirement to have VSOE for undelivered elements to enable the separation of revenue for the delivered software licenses is eliminated under the new standard. Accordingly, under the new standard we will be required to recognize as revenue a portion of the arrangement fee upon delivery of the software licenses. We expect revenue related to our professional services and cloud offerings, including Creative Cloud and Document Cloud for business enterprises, individuals and teams, to remain substantially unchanged. When sold with cloud-enabled services, Creative Cloud and Document Cloud require a significant level of integration and interdependency with software and the individual components are not considered distinct. Revenue for these offerings will continue to be recognized over the period in which the cloud services are provided. Under current GAAP, we expense costs related to the acquisition of revenue-generating contracts as incurred. Under the new standard, we will be required to capitalize certain costs incremental to contract acquisition and amortize them over the expected period of benefit. Due to the complexity of certain of our contracts, the actual accounting treatment required under the new standard for these arrangements may be dependent on contract-specific terms and therefore may vary in some instances.
On February 24, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases with a lease term of twelve months or less. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. The updated standard is effective for us beginning in the first quarter of fiscal 2020 and we do not plan to early adopt. We are currently evaluating the effect that the updated standard will have on our Consolidated Financial Statements and related disclosures.
On August 28, 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging, requiring expanded hedge accounting for both non-financial and financial statementsrisk components and refining the measurement of hedge results to better reflect an entity's hedging strategies. The updated standard also amends the presentation and disclosure requirements and changes how entities assess hedge effectiveness. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition with a cumulative effect adjustment recorded to opening retained earnings as of the initial adoption date. The updated standard is effective for us beginning in the first quarter of fiscal 2020 and we do not plan to early adopt. We are currently evaluating the effect that the updated standard will have on our Consolidated Financial Statements and related disclosures.
With the exception of the new revenue standardstandards discussed above, there have been no other new accounting pronouncements not yet effective that have significance, or potential significance, to our Consolidated Financial Statements.
NOTE 2. ACQUISITIONS
Fiscal 2014 Acquisition
During fiscal 2014, we completed a business acquisition which was not material to our Consolidated Financial Statements.
Subsequent to November 28, 2014, we entered into a a definitive agreement to acquire privately-held Fotolia, a leading marketplace for royalty-free photos, images, graphics and HD video, for approximately $800 million in cash. The transaction is subject to customary regulatory approvals and closing conditions and is expected to close in the first quarter of our fiscal 2015. Following the closing, we intend to integrate Fotolia into our Digital Media reportable segment for financial reporting purposes.
Fiscal 2013 Acquisitions
Neolane
On July 22, 2013, we completed our acquisition of privately held Neolane, a leader in cross-channel campaign management technology. During the third quarter of fiscal 2013, we began integrating Neolane into our Digital Marketing reportable segment. Neolane brings a platform for automation and execution of marketing campaigns across the web, e-mail, social, mobile, call center, direct mail, point of sale and other emerging channels which will drive consistent brand experiences and personalized campaigns for our customers.
Under the acquisition method of accounting, the total final purchase price was allocated to Neolane’s net tangible and intangible assets based upon their estimated fair values as of July 22, 2013. The total final purchase price for Neolane was $616.7
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
million of which $515.2 million was allocated to goodwill that was non-deductible for tax purposes, $115.0 million to identifiable intangible assets and $13.5 million to net liabilities assumed. The impact of this acquisition was not material to our Consolidated Financial Statements.
BehanceNOTE 2. ACQUISITIONS
TubeMogul
On December 20, 2012,19, 2016, we completed our acquisition of privatelyTubeMogul, a publicly held Behance, an online social mediavideo advertising platform to showcase and discover creative work. Duringcompany. As of the first quarterend of fiscal 2013,2017, we began integrating Behanceare continuing to integrate TubeMogul into our Digital MediaMarketing reportable segment. Behance’s community and portfolio capabilities will accelerate our strategy to bring additional community features to Creative Cloud. We have included the financial results of Behance in our Consolidated Financial Statements beginning on the acquisition date.
Under the acquisition method of accounting, the total final purchase price was allocated to Behance’sTubeMogul’s net tangible and intangible assets based upon their estimated fair values as of December 20, 2012.19, 2016. During fiscal 2017, we recorded immaterial purchase accounting adjustments based on changes to management’s estimates and assumptions in regards to tangible assets, liabilities assumed, and their related impact to goodwill. The total final purchase price for BehanceTubeMogul was approximately $111.1$560.8 million of which $91.4$348.4 million was allocated to goodwill $28.5that was non-deductible for tax purposes, $113.1 million to identifiable intangible assets and $8.8$99.3 million to net liabilities assumed. The impact of this acquisition was not material to our Consolidated Financial Statements.assets acquired.
Fiscal 2012 AcquisitionFotolia
Efficient Frontier
On January 13, 2012,27, 2015, we completed our acquisition of privately held Efficient Frontier,Fotolia, a multi-channel digital ad buyingleading marketplace for royalty-free photos, images, graphics and optimization company.HD videos. During the first quarter of fiscal 2012,2015, we began integrating Efficient Frontierintegrated Fotolia into our Digital MarketingMedia reportable segment. The Efficient Frontier business adds cross-channel digital ad campaign forecasting, execution and optimization capabilities to our Adobe Marketing Cloud, along with a social marketing engagement platform and social ad buying capabilities. We have included the financial results of Efficient Frontier in our Consolidated Financial Statements beginning on the acquisition date.
Under the acquisition method of accounting, the total final purchase price was allocated to Efficient Frontier’sFotolia's net tangible and intangible assets based upon their estimated fair values as of January 13, 2012.27, 2015. During fiscal 2012,2015, we maderecorded immaterial purchase accounting adjustments based on changes to the preliminary purchase price allocation.management’s estimates and assumptions in regards to assumed intangible assets, calculation of deferred tax assets, liabilities and equity awards. The total final purchase price for Efficient FrontierFotolia was $374.7$807.5 million of which $291.4$745.1 million was allocated to goodwill $122.7that was non-deductible for tax purposes, $204.4 million to identifiable intangible assets and $39.4$142.0 million to net liabilities assumed. The
We also completed other immaterial business acquisitions during the fiscal years presented. Pro forma information has not been presented for any of our fiscal 2017, 2016 and 2015 acquisitions as the impact of this acquisition was not material to our Consolidated Financial Statements.Statements was not material.
NOTE 3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. We classify all of our cash equivalents and short-term investments as “available-for-sale.” In general, these investments are free of trading restrictions. We carry these investments at fair value, based on quoted market prices or other readily available market information. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity in our Consolidated Balance Sheets. Gains and losses are recognized when realized in our Consolidated Statements of Income. When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in income. Gains and losses are determined using the specific identification method.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash, cash equivalents and short-term investments consisted of the following as of December 1, 2017 (in thousands): |
| | | | | | | | | | | | | | | |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
| Current assets: | | | | | | | |
| Cash | $ | 280,488 |
| | $ | — |
| | $ | — |
| | $ | 280,488 |
|
| Cash equivalents: | | | | | | | |
| Money market mutual funds | 2,006,741 |
| | — |
| | — |
| | 2,006,741 |
|
| Time deposits | 18,843 |
| | — |
| | — |
| | 18,843 |
|
| Total cash equivalents | 2,025,584 |
| | — |
| | — |
| | 2,025,584 |
|
| Total cash and cash equivalents | 2,306,072 |
| | — |
| | — |
| | 2,306,072 |
|
| Short-term fixed income securities: | | | | | | | |
| Asset-backed securities | 98,403 |
| | 1 |
| | (403 | ) | | 98,001 |
|
| Corporate bonds and commercial paper | 2,461,691 |
| | 2,694 |
| | (10,125 | ) | | 2,454,260 |
|
| Foreign government securities | 2,396 |
| | — |
| | (8 | ) | | 2,388 |
|
| Municipal securities | 21,189 |
| | 8 |
| | (132 | ) | | 21,065 |
|
| U.S. Treasury securities | 941,538 |
| | 2 |
| | (3,552 | ) | | 937,988 |
|
| Total short-term investments | 3,525,217 |
| | 2,705 |
| | (14,220 | ) | | 3,513,702 |
|
| Total cash, cash equivalents and short-term investments | $ | 5,831,289 |
| | $ | 2,705 |
| | $ | (14,220 | ) | | $ | 5,819,774 |
|
Cash, cash equivalents and short-term investments consisted of the following as of December 2, 2016 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
| Current assets: | | | | | | | |
| Cash | $ | 208,635 |
| | $ | — |
| | $ | — |
| | $ | 208,635 |
|
| Cash equivalents: | |
| | | | | | |
|
| Corporate bonds and commercial paper | 1,249 |
| | — |
| | — |
| | 1,249 |
|
| Money market mutual funds | 782,210 |
| | — |
| | — |
| | 782,210 |
|
| Municipal securities | 1,301 |
| | — |
| | — |
| | 1,301 |
|
| Time deposits | 17,920 |
| | — |
| | — |
| | 17,920 |
|
| Total cash equivalents | 802,680 |
| | — |
| | — |
| | 802,680 |
|
| Total cash and cash equivalents | 1,011,315 |
| | — |
| | — |
| | 1,011,315 |
|
| Short-term fixed income securities: | | | | | | | |
|
| Asset backed securities | 111,009 |
| | 95 |
| | (190 | ) | | 110,914 |
|
| Corporate bonds and commercial paper | 2,464,769 |
| | 3,135 |
| | (9,554 | ) | | 2,458,350 |
|
| Municipal securities | 134,710 |
| | 37 |
| | (525 | ) | | 134,222 |
|
| U.S. agency securities | 39,538 |
| | 42 |
| | — |
| | 39,580 |
|
| U.S. Treasury securities | 1,008,195 |
| | 194 |
| | (1,470 | ) | | 1,006,919 |
|
| Total short-term investments | 3,758,221 |
| | 3,503 |
| | (11,739 | ) | | 3,749,985 |
|
| Total cash, cash equivalents and short-term investments | $ | 4,769,536 |
| | $ | 3,503 |
| | $ | (11,739 | ) | | $ | 4,761,300 |
|
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash, cash equivalents and short-term investments consisted of the following as of November 28, 2014 (in thousands): |
| | | | | | | | | | | | | | | |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
| Current assets: | | | | | | | |
| Cash | $ | 348,283 |
| | $ | — |
| | $ | — |
| | $ | 348,283 |
|
| Cash equivalents: | | | | | | | |
| Money market mutual funds | 705,978 |
| | — |
| | — |
| | 705,978 |
|
| Time deposits | 63,139 |
| | — |
| | — |
| | 63,139 |
|
| Total cash equivalents | 769,117 |
| | — |
| | — |
| | 769,117 |
|
| Total cash and cash equivalents | 1,117,400 |
| | — |
| | — |
| | 1,117,400 |
|
| Short-term fixed income securities: | | | | | | | |
| Corporate bonds and commercial paper | 1,514,632 |
| | 5,253 |
| | (509 | ) | | 1,519,376 |
|
| Foreign government securities | 4,499 |
| | 12 |
| | — |
| | 4,511 |
|
| Municipal securities | 174,775 |
| | 438 |
| | (12 | ) | | 175,201 |
|
| U.S. agency securities | 497,154 |
| | 1,295 |
| | (64 | ) | | 498,385 |
|
| U.S. Treasury securities | 423,075 |
| | 1,080 |
| | (28 | ) | | 424,127 |
|
| Subtotal | 2,614,135 |
| | 8,078 |
| | (613 | ) | | 2,621,600 |
|
| Marketable equity securities | 153 |
| | 338 |
| | — |
| | 491 |
|
| Total short-term investments | 2,614,288 |
| | 8,416 |
| | (613 | ) | | 2,622,091 |
|
| Total cash, cash equivalents and short-term investments | $ | 3,731,688 |
| | $ | 8,416 |
| | $ | (613 | ) | | $ | 3,739,491 |
|
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash, cash equivalents and short-term investments consisted of the following as of November 29, 2013 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
| Current assets: | | | | | | | |
| Cash | $ | 286,221 |
| | $ | — |
| | $ | — |
| | $ | 286,221 |
|
| Cash equivalents: | |
| | | | | | |
|
| Money market mutual funds | 429,373 |
| | — |
| | — |
| | 429,373 |
|
| Time deposits | 104,711 |
| | — |
| | — |
| | 104,711 |
|
| U.S. Treasury securities | 14,251 |
| | — |
| | — |
| | 14,251 |
|
| Total cash equivalents | 548,335 |
| | — |
| | — |
| | 548,335 |
|
| Total cash and cash equivalents | 834,556 |
| | — |
| | — |
| | 834,556 |
|
| Short-term fixed income securities: | | | | | | | |
|
| Corporate bonds and commercial paper | 1,261,375 |
| | 7,116 |
| | (631 | ) | | 1,267,860 |
|
| Foreign government securities | 11,213 |
| | 56 |
| | — |
| | 11,269 |
|
| Municipal securities | 186,320 |
| | 328 |
| | (24 | ) | | 186,624 |
|
| U.S. agency securities | 446,615 |
| | 1,516 |
| | (186 | ) | | 447,945 |
|
| U.S. Treasury securities | 424,076 |
| | 799 |
| | (97 | ) | | 424,778 |
|
| Subtotal | 2,329,599 |
| | 9,815 |
| | (938 | ) | | 2,338,476 |
|
| Marketable equity securities | 177 |
| | 543 |
| | — |
| | 720 |
|
| Total short-term investments | 2,329,776 |
| | 10,358 |
| | (938 | ) | | 2,339,196 |
|
| Total cash, cash equivalents and short-term investments | $ | 3,164,332 |
| | $ | 10,358 |
| | $ | (938 | ) | | $ | 3,173,752 |
|
See Note 4 for further information regarding the fair value of our financial instruments.
The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that have been in an unrealized loss position for less than twelve months, as of November 28, 2014December 1, 2017 and November 29, 2013December 2, 2016 (in thousands):
| | | | 2014 | | 2013 | 2017 | | 2016 |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| Corporate bonds and commercial paper | $ | 291,890 |
| | $ | (443 | ) | | $ | 225,759 |
| | $ | (631 | ) | $ | 1,338,232 |
| | $ | (5,459 | ) | | $ | 1,282,076 |
| | $ | (9,474 | ) |
| Asset-backed securities | | 64,618 |
| | (193 | ) | | 54,063 |
| | (189 | ) |
| Municipal securities | 21,759 |
| | (12 | ) | | 13,522 |
| | (24 | ) | 11,805 |
| | (115 | ) | | 114,810 |
| | (525 | ) |
| Foreign government securities | | 2,388 |
| | (8 | ) | | — |
| | — |
|
| U.S. Treasury and agency securities | 43,507 |
| | (64 | ) | | 105,278 |
| | (283 | ) | 593,296 |
| | (2,087 | ) | | 580,529 |
| | (1,470 | ) |
| Total | $ | 357,156 |
| | $ | (519 | ) | | $ | 344,559 |
| | $ | (938 | ) | $ | 2,010,339 |
| | $ | (7,862 | ) | | $ | 2,031,478 |
| | $ | (11,658 | ) |
There were 213894 securities and 1771,052 securities in an unrealized loss position for less than twelve months at November 28, 2014December 1, 2017 and at November 29, 2013December 2, 2016, respectively.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that were in a continuous unrealized loss position for more than twelve months, as of November 28, 2014December 1, 2017 and December 2, 2016 (in thousands):
| | | | | 2014 | 2017 | | 2016 |
| | | Fair Value | | Gross Unrealized Losses | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| Corporate bonds and commercial paper | Corporate bonds and commercial paper | $ | 8,636 |
| | $ | (66 | ) | $ | 500,689 |
| | $ | (4,666 | ) | | $ | 39,162 |
| | $ | (80 | ) |
| U.S. Treasury and agency securities | 5,884 |
| | (28 | ) | |
| Asset-backed security | | 32,383 |
| | (210 | ) | | 1,331 |
| | (1 | ) |
| Municipal securities | | 598 |
| | (17 | ) | | — |
| | — |
|
| U.S. Treasury securities | | 338,950 |
| | (1,465 | ) | | — |
| | — |
|
| Total | Total | $ | 14,520 |
| | $ | (94 | ) | $ | 872,620 |
| | $ | (6,358 | ) | | $ | 40,493 |
| | $ | (81 | ) |
As ofThere were 360 securities and November 28, 2014, there were eight securities in an unrealized loss position for more than twelve months. As of November 29, 2013 there were no23 securities in an unrealized loss position for more than twelve months.months at December 1, 2017 and at December 2, 2016, respectively.
The following table summarizes the cost and estimated fair value of short-term fixed income securities classified as short-term investments based on stated effective maturities as of November 28, 2014December 1, 2017 (in thousands):
| | | | Amortized Cost | | Estimated Fair Value | Amortized Cost | | Estimated Fair Value |
| Due within one year | $ | 606,090 |
| | $ | 607,222 |
| $ | 1,025,894 |
| | $ | 1,023,639 |
|
| Due between one and two years | 901,940 |
| | 904,938 |
| 1,294,919 |
| | 1,289,307 |
|
| Due between two and three years | 831,932 |
| | 834,148 |
| 815,254 |
| | 812,828 |
|
| Due after three years | 274,173 |
| | 275,292 |
| 389,150 |
| | 387,928 |
|
| Total | $ | 2,614,135 |
| | $ | 2,621,600 |
| $ | 3,525,217 |
| | $ | 3,513,702 |
|
We review our debt and marketable equity securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. We consider factors such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and our intent to sell, or whether it is more likely than not we will be required to sell the investment before recovery of the investment’s amortized cost basis. If we believe that an other-than-temporary decline exists in one of these securities, we write down these investments to fair value. For debt securities, the portion of the write-down related to credit loss would be recorded
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to interest and other income, net in our Consolidated Statements of Income. Any portion not related to credit loss would be recorded to accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity in our Consolidated Balance Sheets. For equity securities, the write-down would be recorded to investment gains (losses), net in our Consolidated Statements of Income. During fiscal 20142017 and 2013,2015, we did not consider any of our investments to be other-than-temporarily impaired. During fiscal 2012,2016, we recorded immaterial other-than-temporary impairment losses associated with certain of our marketable equityfixed income securities and did not consider any of our debtwrote down the securities to be other-than-temporarily impaired.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
We measure certain financial assets and liabilities at fair value on a recurring basis. There have been no transfers between fair value measurement levels during the year ended November 28, 2014.December 1, 2017.
The fair value of our financial assets and liabilities at November 28, 2014December 1, 2017 was determined using the following inputs (in thousands):
| | | | Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using |
| | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
| | Total | | (Level 1) | | (Level 2) | | (Level 3) | Total | | (Level 1) | | (Level 2) | | (Level 3) |
| Assets: | | | | | | | | | | | | | | |
| Cash equivalents: | | | | | | | | | | | | | | |
| Money market mutual funds | 705,978 |
| | 705,978 |
| | — |
| | — |
| $ | 2,006,741 |
| | $ | 2,006,741 |
| | $ | — |
| | $ | — |
|
| Time deposits | 63,139 |
| | 63,139 |
| | — |
| | — |
| 18,843 |
| | 18,843 |
| | — |
| | — |
|
| Short-term investments: | | | | | | | | | | | | | | |
| Asset-backed securities | | 98,001 |
| | — |
| | 98,001 |
| | — |
|
| Corporate bonds and commercial paper | 1,519,376 |
| | — |
| | 1,519,376 |
| | — |
| 2,454,260 |
| | — |
| | 2,454,260 |
| | — |
|
| Foreign government securities | 4,511 |
| | — |
| | 4,511 |
| | — |
| 2,388 |
| | — |
| | 2,388 |
| | — |
|
| Marketable equity securities | 491 |
| | 491 |
| | — |
| | — |
| |
| Municipal securities | 175,201 |
| | — |
| | 175,201 |
| | — |
| 21,065 |
| | — |
| | 21,065 |
| | — |
|
| U.S. agency securities | 498,385 |
| | — |
| | 498,385 |
| | — |
| |
| U.S. Treasury securities | 424,127 |
| | — |
| | 424,127 |
| | — |
| 937,988 |
| | — |
| | 937,988 |
| | — |
|
| Prepaid expenses and other current assets: | | | |
| | |
| | |
| | | |
| | |
| | |
|
| Foreign currency derivatives | 32,991 |
| | — |
| | 32,991 |
| | — |
| 14,198 |
| | — |
| | 14,198 |
| | — |
|
| Other assets: | | | |
| | |
| | |
| | | |
| | |
| | |
|
| Deferred compensation plan assets | 25,745 |
| | 549 |
| | 25,196 |
| | — |
| 56,690 |
| | 2,573 |
| | 54,117 |
| | — |
|
| Interest rate swap derivatives | 14,268 |
| | — |
| | 14,268 |
| | — |
| |
| Total assets | $ | 3,464,212 |
| | $ | 770,157 |
| | $ | 2,694,055 |
| | $ | — |
| $ | 5,610,174 |
| | $ | 2,028,157 |
| | $ | 3,582,017 |
| | $ | — |
|
| | | Liabilities: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Accrued expenses: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Foreign currency derivatives | $ | 663 |
| | $ | — |
| | $ | 663 |
| | $ | — |
| $ | 1,598 |
| | $ | — |
| | $ | 1,598 |
| | $ | — |
|
| Other liabilities: | | | | | | | | |
| Interest rate swap derivatives | | 1,058 |
| | — |
| | 1,058 |
| | — |
|
| Total liabilities | $ | 663 |
| | $ | — |
| | $ | 663 |
| | $ | — |
| $ | 2,656 |
| | $ | — |
| | $ | 2,656 |
| | $ | — |
|
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of our financial assets and liabilities at November 29, 2013December 2, 2016 was determined using the following inputs (in thousands):
| | | | Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using |
| | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs | | | Quoted Prices in Active Markets for Identical Assets | | Significant Other Observable Inputs | | Significant Unobservable Inputs |
| | Total | | (Level 1) | | (Level 2) | | (Level 3) | Total | | (Level 1) | | (Level 2) | | (Level 3) |
| Assets: | | | | | | | | | | | | | | |
| Cash equivalents: | | | | | | | | | | | | | | |
| Corporate bonds and commercial paper | | $ | 1,249 |
| | $ | — |
| | $ | 1,249 |
| | $ | — |
|
| Money market mutual funds | 429,373 |
| | 429,373 |
| | — |
| | — |
| 782,210 |
| | 782,210 |
| | — |
| | — |
|
| Municipal securities | | 1,301 |
| | — |
| | 1,301 |
| | — |
|
| Time deposits | 104,711 |
| | 104,711 |
| | — |
| | — |
| 17,920 |
| | 17,920 |
| | — |
| | — |
|
| U.S. Treasury securities | 14,251 |
| | — |
| | 14,251 |
| | — |
| |
| Short-term investments: | |
| | | | | | | |
| | | | | | |
| Asset-backed securities | | 110,914 |
| | — |
| | 110,914 |
| | — |
|
| Corporate bonds and commercial paper | 1,267,860 |
| | — |
| | 1,267,860 |
| | — |
| 2,458,350 |
| | — |
| | 2,458,350 |
| | — |
|
| Foreign government securities | 11,269 |
| | — |
| | 11,269 |
| | — |
| |
| Marketable equity securities | 720 |
| | 720 |
| | — |
| | — |
| |
| Municipal securities | 186,624 |
| | — |
| | 186,624 |
| | — |
| 134,222 |
| | — |
| | 134,222 |
| | — |
|
| U.S. agency securities | 447,945 |
| | — |
| | 447,945 |
| | — |
| 39,580 |
| | — |
| | 39,580 |
| | — |
|
| U.S. Treasury securities | 424,778 |
| | — |
| | 424,778 |
| | — |
| 1,006,919 |
| | — |
| | 1,006,919 |
| | — |
|
| Prepaid expenses and other current assets: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Foreign currency derivatives | 11,891 |
| | — |
| | 11,891 |
| | — |
| 38,112 |
| | — |
| | 38,112 |
| | — |
|
| Other assets: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Deferred compensation plan assets | 19,816 |
| | 894 |
| | 18,922 |
| | — |
| 42,180 |
| | 1,831 |
| | 40,349 |
| | — |
|
| Interest rate swap derivatives | | 13,117 |
| | — |
| | 13,117 |
| | — |
|
| Total assets | $ | 2,919,238 |
| | $ | 535,698 |
| | $ | 2,383,540 |
| | $ | — |
| $ | 4,646,074 |
| | $ | 801,961 |
| | $ | 3,844,113 |
| | $ | — |
|
| | | Liabilities: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Accrued expenses: | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
|
| Foreign currency derivatives | $ | 1,067 |
| | $ | — |
| | $ | 1,067 |
| | $ | — |
| $ | 5,246 |
| | $ | — |
| | $ | 5,246 |
| | $ | — |
|
| Total liabilities | $ | 1,067 |
| | $ | — |
| | $ | 1,067 |
| | $ | — |
| $ | 5,246 |
| | $ | — |
| | $ | 5,246 |
| | $ | — |
|
Our fixed income available-for-sale debt securities consist of high quality, investment grade securities from diverse issuers with a minimum credit rating of BBB and a weighted average credit rating of AA-. We value these securities based on pricing from independent pricing vendors who may use matrix pricing valuation techniques including market approach methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies. Inputs include quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. However, wevalue, including benchmark yields, issuer spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. We therefore classify all of our fixed income available-for-sale securities as having Level 2 inputs. The valuation techniques used to measure the fair value of our financial instruments and derivatives having Level 2 inputs were derived from non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models such as discounted cash flow techniques. Our2. We perform routine procedures include controls to ensure that appropriate fair values are recorded such as comparing prices obtained from multiple independent sources. sources to ensure that appropriate fair values are recorded.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair values of our money market mutual funds and time deposits are based on the closing price of these assets as of the reporting date. We classify our money market mutual funds and time deposits as Level 1.
Our Level 2 over-the-counter foreign currency and interest rate swap derivatives are valued using pricing models and discounted cash flow methodologies based on observable foreign exchange and interest rate data at the measurement date.
Our deferred compensation plan assets consist of prime money market mutual funds and other mutual funds.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We also have direct investments in privately held companies accounted for under the cost and equity method, which are periodically assessed for other-than-temporary impairment. If we determine that an other-than-temporary impairment has occurred, we write
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
down the investment to its fair value. We estimate fair value of our cost and equity method investments considering available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. During fiscal 20142017, and 2015, we determined there were no other-than-temporary impairments on our cost and equity method investments. During fiscal 2013,2016, we determined there were immaterial other-than-temporary impairments of $7.0 million on certain of our cost method investments which were writtenand wrote down the investments to fair value.
As of November 28, 2014, the carrying value of our lease receivables approximated fair value, based on Level 2 valuation inputs which include Treasury rates, London Interbank Offered Rates (“LIBOR”) and applicable credit spreads. See Note 15 for further details regarding our investment in lease receivables.
NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES
Hedge Accounting and Hedging Programs
We recognize derivative instruments and hedging activities as either assets or liabilities in our Consolidated Balance Sheets and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.
Fair Value Hedging—Interest Rate Swap
During the third quarter of fiscal 2014, we entered into interest rate swaps designated as a fair value hedge related to our $900 million of 4.75% fixed interest rate senior notes due February 1, 2020 (the “2020 Notes”). In effect, the interest rate swaps convert the fixed interest rate on our 2020 Notes to a floating interest rate based on the LIBOR. Under the terms of the swaps, we will pay monthly interest at the one-month LIBOR rate plus a fixed number of basis points on the $900 million notional amount through February 1, 2020. In exchange, we will receive 4.75% fixed rate interest from the swap counterparties. See Note 16 for further details regarding our debt.
The interest rate swaps are accounted for as fair value hedges and substantially offset the changes in fair value of the hedged portion of the underlying debt that are attributable to the changes in market risk. Therefore, the gains and losses related to changes in the fair value of the interest rate swaps are included in interest and other income (expense), net in our Consolidated Statements of Income. The fair value of the interest rate swaps is reflected in other assets in our Consolidated Balance Sheets.
Economic Hedging—Hedges of Forecasted Transactions
In countries outside the U.S., we transact business in U.S. Dollars and in various other currencies. We may use foreign exchange option contracts or forward contracts to hedge certain cash flow exposures resulting from changes in these foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to twelve months. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business and accordingly, they are not speculative in nature.
We recognize these contracts as derivative instruments and they are classified as either assets or liabilities on the balance sheet and measured on a recurring basis at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the contract and whether it is designated and qualifies for hedge accounting. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income in our Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income (expense), net in our Consolidated Statements of Income at that time. If we do not elect hedge accounting, or the contract does not qualify for hedge accounting treatment, the changes in fair market value from period to period are recorded in interest and other income (expense), net in our Consolidated Statements of Income. For fiscal 2014 and 2013, net gains or losses recognized in other income relating
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to hedges of forecasted transactions that did not occur were insignificant. For fiscal 2012, there were no such gains or losses recognized in interest and other income, net relating to hedges of forecasted transactions that did not occur.
We evaluate hedge effectiveness at the inception of the hedge prospectively as well as retrospectively, and record any ineffective portion of the hedging instruments in interest and other income (expense), net on our Consolidated Statements of Income. The net gain (loss) recognized in interest and other income (expense), net for cash flow hedges due to hedge ineffectiveness was insignificant for all fiscal years presented. The time value of purchased contracts is recorded in interest and other income (expense), net in our Consolidated Statements of Income.
The bank counterparties to these contracts expose us to credit-related losses in the event of their nonperformance which are largely mitigated with collateral security agreements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. In addition, we enter into master netting arrangements which have the ability to further limit credit-related losses with the same counterparty by permitting net settlement of transactions.
Balance Sheet Hedging—HedgingHedges of Foreign Currency Assets and Liabilities
We also hedge our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and liabilities will be adversely affected by changes in exchange rates. These contracts hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded to interest and other income (expense), net in our Consolidated Statements of Income. These contracts do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged.
As of November 28, 2014,December 1, 2017, total notional amounts of outstanding contracts were $235.5$333.9 million which included the notional equivalent of $137.2$105.0 million in Euros, $30.9$34.6 million in British Pounds, $45.4 million in Japanese Yen, $78.0 million in Indian Rupees, and $67.4$70.9 million in other foreign currencies. As of November 29, 2013,December 2, 2016, total notional amounts of outstanding contracts were $282.8$313.8 million which included the notional equivalent of $99.0$152.8 million in Euros, $33.8$33.6 million in British Pounds, $46.5
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
million in Japanese Yen, $26.4 million in Indian Rupees, and $150.0$54.5 million in other foreign currencies. At November 28, 2014December 1, 2017 and November 29, 2013,December 2, 2016, the outstanding balance sheet hedging derivatives had maturities of 180 days or less.
Cash Flow Hedging—Hedges of Forecasted Foreign Currency Revenue
In countries outside the United States, we transact business in U.S. Dollars and in various other currencies. We may use foreign exchange option contracts or forward contracts to hedge certain cash flow exposures resulting from changes in these foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to twelve months. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business and accordingly, they are not speculative in nature.
To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income (loss) in our Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to interest and other income (expense), net in our Consolidated Statements of Income at that time. If we do not elect hedge accounting, or the contract does not qualify for hedge accounting treatment, the changes in fair value from period to period are recorded in interest and other income (expense), net in our Consolidated Statements of Income.
For fiscal 2017 and 2016, there were no net gains or losses recognized in other income relating to hedges of forecasted transactions that did not occur. In fiscal 2015, these net gains or losses were immaterial.
Fair Value Hedging—Hedges of Interest Rate Risks
During the third quarter of fiscal 2014, we entered into interest rate swaps designated as a fair value hedge related to our $900 million of 4.75% fixed interest rate senior notes due February 1, 2020 (the “2020 Notes”). In effect, the interest rate swaps convert the fixed interest rate on our 2020 Notes to a floating interest rate based on the LIBOR. Under the terms of the swaps, we will pay monthly interest at the one-month LIBOR rate plus a fixed number of basis points on the $900 million notional amount through February 1, 2020. In exchange, we will receive 4.75% fixed rate interest from the swap counterparties. See Note 15 for further details regarding our debt. The interest rate swaps are accounted for as fair value hedges and substantially offset the changes in fair value of the hedged portion of the underlying debt that are attributable to the changes in market risk. Therefore, the gains and losses related to changes in the fair value of the interest rate swaps are included in interest and other income (expense), net in our Consolidated Statements of Income. The fair value of the interest rate swaps is reflected in other liabilities or other assets in our Consolidated Balance Sheets.
The fair value of derivative instruments on our Consolidated Balance Sheets as of November 28, 2014December 1, 2017 and November 29, 2013December 2, 2016 were as follows (in thousands):
| | | | 2014 | | 2013 | 2017 | | 2016 |
| | Fair Value Asset Derivatives | | Fair Value Liability Derivatives | | Fair Value Asset Derivatives | | Fair Value Liability Derivatives | Fair Value Asset Derivatives | | Fair Value Liability Derivatives | | Fair Value Asset Derivatives | | Fair Value Liability Derivatives |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | | | |
Foreign exchange option contracts (1)(3) | $ | 31,275 |
| | $ | — |
| | $ | 8,913 |
| | $ | — |
| |
Foreign exchange option contracts (1)(2) | | $ | 12,918 |
| | $ | — |
| | $ | 34,355 |
| | $ | — |
|
Interest rate swap (2)(3) | 14,268 |
| | — |
| | — |
| | — |
| — |
| | 1,058 |
| | 13,117 |
| | — |
|
| Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | |
Foreign exchange forward contracts (1) | 1,716 |
| | 663 |
| | 2,978 |
| | 1,067 |
| 1,280 |
| | 1,598 |
| | 3,757 |
| | 5,246 |
|
| Total derivatives | $ | 47,259 |
| | $ | 663 |
| | $ | 11,891 |
| | $ | 1,067 |
| $ | 14,198 |
| | $ | 2,656 |
| | $ | 51,229 |
| | $ | 5,246 |
|
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
_________________________________________
| |
(1) | Included in prepaid expenses and other current assets and accrued expenses for asset derivatives and liability derivatives, respectively, on our Consolidated Balance Sheets. |
| |
(2) | Included in other assets on our Consolidated Balance Sheets. |
| |
(3)
| Hedging effectiveness expected to be recognized to income within the next twelve months. |
The aggregate fair value of derivative instruments in net asset positions represent the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted. This exposure could be reduced by the fair value of liabilities included in master netting arrangements with those same counterparties.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
(3) | Included in other liabilities and other assets in fiscal 2017 and 2016, respectively, on our Consolidated Balance Sheets. |
The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our Consolidated Statements of Income for fiscal 20142017, 20132016 and 20122015 were as follows (in thousands):
| | | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| | Foreign Exchange Option Contracts | | Foreign Exchange Forward Contracts | | Foreign Exchange Option Contracts | | Foreign Exchange Forward Contracts | | Foreign Exchange Option Contracts | | Foreign Exchange Forward Contracts | Foreign Exchange Option Contracts | | Foreign Exchange Forward Contracts | | Foreign Exchange Option Contracts | | Foreign Exchange Forward Contracts | | Foreign Exchange Option Contracts | | Foreign Exchange Forward Contracts |
| Derivatives in cash flow hedging relationships: | | | | | | | | | | | | | | | | | | | | | | |
Net gain (loss) recognized in OCI, net of tax(1) | $ | 41,993 |
| | $ | — |
| | $ | 34,677 |
| | $ | — |
| | $ | 23,922 |
| | $ | — |
| |
Net gain (loss) reclassified from accumulated OCI into income, net of tax(2) | $ | 18,705 |
| | $ | — |
| | $ | 35,914 |
| | $ | — |
| | $ | 30,672 |
| | $ | — |
| |
Net gain (loss) recognized in other comprehensive income, net of tax(1) | | $ | 6,917 |
| | $ | — |
| | $ | 36,511 |
| | $ | — |
| | $ | 39,825 |
| | $ | — |
|
Net gain (loss) reclassified from accumulated other comprehensive income into income, net of tax(2) | | $ | 32,852 |
| | $ | — |
| | $ | 18,823 |
| | $ | — |
| | $ | 56,336 |
| | $ | — |
|
Net gain (loss) recognized in income(3) | $ | (14,962 | ) | | $ | — |
| | $ | (21,098 | ) | | $ | — |
| | $ | (29,554 | ) | | $ | — |
| $ | (30,243 | ) | | $ | — |
| | $ | (29,169 | ) | | $ | — |
| | $ | (17,423 | ) | | $ | — |
|
| Derivatives not designated as hedging relationships: | | | | | | | | | | | | | | | | | | | | | | |
Net gain (loss) recognized in income(4) | $ | — |
| | $ | 466 |
| | $ | — |
| | $ | 2,129 |
| | $ | — |
| | $ | 8,742 |
| $ | — |
| | $ | 6,586 |
| | $ | — |
| | $ | (1,308 | ) | | $ | — |
| | $ | 4,430 |
|
_________________________________________
| |
(1) | Net change in the fair value of the effective portion classified in OCI.other comprehensive income (“OCI”). |
| |
(2) | Effective portion classified as revenue. |
| |
(3) | Ineffective portion and amount excluded from effectiveness testing classified in interest and other income (expense), net. |
| |
(4) | Classified in interest and other income (expense), net. |
Net gains (losses) recognized in interest and other income (expense), net relating to balance sheet hedging for fiscal 20142017, 20132016 and 20122015 were as follows (in thousands):
|
| | | | | | | | | | | | |
| | | 2014 | | 2013 | | 2012 |
| Gain (loss) on foreign currency assets and liabilities: | | | | | | |
| Net realized gain (loss) recognized in other income | | $ | (21,559 | ) | | $ | (4,783 | ) | | $ | (5,899 | ) |
| Net unrealized gain (loss) recognized in other income | | 17,217 |
| | 2,751 |
| | (4,720 | ) |
| | | (4,342 | ) | | (2,032 | ) | | (10,619 | ) |
| Gain (loss) on hedges of foreign currency assets and liabilities: | | | | | | |
| Net realized gain recognized in other income | | 1,324 |
| | 1,835 |
| | 9,312 |
|
| Net unrealized gain (loss) recognized in other income | | (858 | ) | | 294 |
| | (570 | ) |
| | | 466 |
| | 2,129 |
| | 8,742 |
|
| Net gain (loss) recognized in interest and other income (expense), net | | $ | (3,876 | ) | | $ | 97 |
| | $ | (1,877 | ) |
Table of Contents |
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Gain (loss) on foreign currency assets and liabilities: | | | | | | |
| Net realized gain (loss) recognized in other income | | $ | (6,142 | ) | | $ | 832 |
| | $ | (10,952 | ) |
| Net unrealized gain (loss) recognized in other income | | (907 | ) | | (6,070 | ) | | 3,815 |
|
| | | (7,049 | ) | | (5,238 | ) | | (7,137 | ) |
| Gain (loss) on hedges of foreign currency assets and liabilities: | | | | | | |
| Net realized gain recognized in other income | | 5,415 |
| | 174 |
| | 5,490 |
|
| Net unrealized gain (loss) recognized in other income | | 1,171 |
| | (1,482 | ) | | (1,060 | ) |
| | | 6,586 |
| | (1,308 | ) | | 4,430 |
|
| Net gain (loss) recognized in interest and other income (expense), net | | $ | (463 | ) | | $ | (6,546 | ) | | $ | (2,707 | ) |
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following as of November 28, 2014December 1, 2017 and November 29, 2013December 2, 2016 (in thousands):
| | | | | 2014 | | 2013 | | 2017 | | 2016 |
| Computers and equipment | | $ | 855,218 |
| | $ | 731,767 |
| | $ | 1,128,264 |
| | $ | 1,051,937 |
|
| Furniture and fixtures | | 82,385 |
| | 82,904 |
| | 115,273 |
| | 94,243 |
|
| Server hardware under capital lease | | 25,703 |
| | 61,007 |
| |
| Capital projects in-progress | | 68,652 |
| | 54,593 |
| | 5,575 |
| | 7,648 |
|
| Leasehold improvements | | 240,506 |
| | 235,859 |
| | 120,165 |
| | 110,414 |
|
| Land | | 106,283 |
| | 106,283 |
| | 77,723 |
| | 77,340 |
|
| Buildings | | 320,410 |
| | 175,325 |
| | 490,665 |
| | 382,364 |
|
| Building improvements | | | 265,829 |
| | 202,266 |
|
| Total | | 1,699,157 |
| | 1,447,738 |
| | 2,203,494 |
| | 1,926,212 |
|
| Less accumulated depreciation and amortization | | (914,034 | ) | | (787,964 | ) | | (1,266,518 | ) | | (1,109,948 | ) |
| Property and equipment, net | | $ | 785,123 |
| | $ | 659,774 |
| | $ | 936,976 |
| | $ | 816,264 |
|
Depreciation and amortization expense of property and equipment for fiscal 2014, 20132017, 2016 and 20122015 was $144.2$156.9 million, $144.7$157.6 million and $134.4$146.3 million, respectively.
In August 2014,March 2017, we exercised our option to purchase the East and West TowersAlmaden Tower for a total purchase price of $143.2 million.$103.6 million. We capitalized the East and West TowersAlmaden Tower as property and equipment on our Consolidated Balance Sheets at $144.1$104.2 million, the lesser of cost or fair value, which represented the total purchase price plus other direct costs associated with the purchase. These buildings will be depreciated over their useful life of 40 years on a straight-line basis.
In May 2013, management approved a plan to sell land, building and other assets located in Waltham, Massachusetts (the “Waltham property assets”) with a total carrying amount of $47.4 million. The decision to sell the Waltham property assets was largely based upon lack of operational needsConsolidated Financial Statements for a facility of this size, in combination with recent improvements in market conditions for commercial real estate in the area. During May 2013, we began to actively market the Waltham property assets and we expected to sell the property within one year from management’s approvaladditional information regarding purchase of the plan and classified the Waltham property assets as held for sale at $23.6 million representing their fair value, net of estimated costs to sell which was the lesser of the fair value less cost to sell or carrying amount of the assets. The fair value, net of estimated cost to sell was measured with the assistance of third-party valuation models which used inputs such as market comparable data for similar properties to be purchased by other operating and investing entities and discounted cash flow techniques as part of the analysis. The fair value measurement was categorized as Level 3 as significant unobservable inputs were used in the valuation analysis. We ceased recognizing depreciation expense on the Waltham property assets upon reclassification. As a result, we recorded a write-down of $23.8 million during fiscal 2013. These charges are included in restructuring and other related charges in our Consolidated Statements of Income for fiscal 2013. In September 2013, we finalized the sale of the Waltham property assets for net proceeds of $24.3 million which approximated the carrying value of the assets at the time of sale.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7. GOODWILL AND PURCHASED AND OTHER INTANGIBLES
Goodwill by reportable segment and activity for the years ended November 28, 2014December 1, 2017 and November 29, 2013December 2, 2016 was as follows (in thousands):
| | | | | 2012 | | Acquisitions | | Other(1) | | 2013 | | Acquisitions | | Other(1) | | 2014 | | 2015 | | Acquisitions | | Other(1) | | 2016 | | Acquisitions | | Other(1) | | 2017 |
| Digital Media | | $ | 1,958,330 |
| | $ | 91,355 |
| | $ | 41 |
| | $ | 2,049,726 |
| | $ | 12,510 |
| | $ | (4,838 | ) | | $ | 2,057,398 |
| | $ | 2,796,302 |
| | $ | — |
| | $ | 288 |
| | $ | 2,796,590 |
| | $ | — |
| | $ | 4,501 |
| | $ | 2,801,091 |
|
| Digital Marketing | | 1,916,468 |
| | 526,739 |
| | 20,621 |
| | 2,463,828 |
| | — |
| | (57,687 | ) | | 2,406,141 |
| | 2,312,158 |
| | 35,802 |
| | 3,502 |
| | 2,351,462 |
| | 348,352 |
| | 62,232 |
| | 2,762,046 |
|
| Print and Publishing | | 258,461 |
| | — |
| | (34 | ) | | 258,427 |
| | — |
| | (4 | ) | | 258,423 |
| | 258,421 |
| | — |
| | 1 |
| | 258,422 |
| | — |
| | 2 |
| | 258,424 |
|
| Goodwill | | $ | 4,133,259 |
| | $ | 618,094 |
| | $ | 20,628 |
| | $ | 4,771,981 |
| | $ | 12,510 |
| | $ | (62,529 | ) | | $ | 4,721,962 |
| | $ | 5,366,881 |
| | $ | 35,802 |
| | $ | 3,791 |
| | $ | 5,406,474 |
| | $ | 348,352 |
| | $ | 66,735 |
| | $ | 5,821,561 |
|
_________________________________________
| |
(1) | Amounts primarily consist of foreign currency translation adjustments. |
Purchased and other intangible assets by reportable segment as of November 28, 2014December 1, 2017 and November 29, 2013December 2, 2016 were as follows (in thousands):
|
| | | | | | | | |
| | | 2014 | | 2013 |
| Digital Media | | $ | 147,182 |
| | $ | 170,213 |
|
| Digital Marketing | | 321,086 |
| | 433,245 |
|
| Print and Publishing | | 1,394 |
| | 1,796 |
|
| Purchased and other intangible assets, net | | $ | 469,662 |
| | $ | 605,254 |
|
Purchased and other intangible assets subject to amortization as of November 28, 2014 and November 29, 2013 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 |
| | Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
| Purchased technology | $ | 405,208 |
| | $ | (264,697 | ) | | $ | 140,511 |
| | $ | 423,237 |
| | $ | (220,414 | ) | | $ | 202,823 |
|
| Customer contracts and relationships | $ | 376,994 |
| | $ | (143,330 | ) | | $ | 233,664 |
| | $ | 389,800 |
| | $ | (111,416 | ) | | $ | 278,384 |
|
| Trademarks | 67,268 |
| | (36,516 | ) | | 30,752 |
| | 67,546 |
| | (27,933 | ) | | 39,613 |
|
| Acquired rights to use technology | 148,836 |
| | (86,258 | ) | | 62,578 |
| | 155,322 |
| | (76,740 | ) | | 78,582 |
|
| Localization | 549 |
| | (382 | ) | | 167 |
| | 3,404 |
| | (2,172 | ) | | 1,232 |
|
| Other intangibles | 3,163 |
| | (1,173 | ) | | 1,990 |
| | 16,447 |
| | (11,827 | ) | | 4,620 |
|
| Total other intangible assets | $ | 596,810 |
| | $ | (267,659 | ) | | $ | 329,151 |
| | $ | 632,519 |
| | $ | (230,088 | ) | | $ | 402,431 |
|
Purchased and other intangible assets, net | $ | 1,002,018 |
| | $ | (532,356 | ) | | $ | 469,662 |
| | $ | 1,055,756 |
| | $ | (450,502 | ) | | $ | 605,254 |
|
In fiscal 2013, we acquired rights to use certain technology for $51.8 million. Of this cost, an estimated $25.3 million was related to future licensing rights and has been capitalized and is being amortized on a straight-line basis over the estimated useful lives ranging from five to ten years. We estimated that the remaining cost of $26.5 million was related to historical use of licensing rights and was expensed as cost of product revenue.
In fiscal 2014, certain purchased intangibles associated with our acquisitions of Efficient Frontier and Day Software Holding AG became fully amortized and were removed from the Consolidated Balance Sheets. Amortization expense related to purchased and other intangible assets was $152.7 million for fiscal 2014. Excluding the expense associated with historical use of the acquired rights to use the technology discussed in the paragraph above, amortization expense was $156.9 million for fiscal 2013. Amortization expense related to purchased and other intangible assets was $146.2 million for fiscal 2012. Of these amounts, for fiscal 2014, 2013 and 2012, $100.2 million, $105.7 million and $100.8 million, respectively, were included in cost of sales.
Table of Contents |
| | | | | | | | |
| | | 2017 | | 2016 |
| Digital Media | | $ | 128,243 |
| | $ | 203,570 |
|
| Digital Marketing | | 257,408 |
| | 210,823 |
|
| Print and Publishing | | 7 |
| | 12 |
|
| Purchased and other intangible assets, net | | $ | 385,658 |
| | $ | 414,405 |
|
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Purchased and other intangible assets subject to amortization as of December 1, 2017 and December 2, 2016 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Cost | | Accumulated Amortization | | Net | | Cost | | Accumulated Amortization | | Net |
| Purchased technology | $ | 223,252 |
| | $ | (110,433 | ) | | $ | 112,819 |
| | $ | 149,253 |
| | $ | (82,091 | ) | | $ | 67,162 |
|
| Customer contracts and relationships | $ | 577,484 |
| | $ | (356,613 | ) | | $ | 220,871 |
| | $ | 541,366 |
| | $ | (274,380 | ) | | $ | 266,986 |
|
| Trademarks | 76,255 |
| | (56,094 | ) | | 20,161 |
| | 76,355 |
| | (46,846 | ) | | 29,509 |
|
| Acquired rights to use technology | 71,130 |
| | (54,223 | ) | | 16,907 |
| | 87,403 |
| | (60,929 | ) | | 26,474 |
|
| Localization | 603 |
| | (170 | ) | | 433 |
| | 631 |
| | (177 | ) | | 454 |
|
| Other intangibles | 38,693 |
| | (24,226 | ) | | 14,467 |
| | 38,693 |
| | (14,873 | ) | | 23,820 |
|
| Total other intangible assets | $ | 764,165 |
| | $ | (491,326 | ) | | $ | 272,839 |
| | $ | 744,448 |
| | $ | (397,205 | ) | | $ | 347,243 |
|
Purchased and other intangible
assets, net | $ | 987,417 |
| | $ | (601,759 | ) | | $ | 385,658 |
| | $ | 893,701 |
| | $ | (479,296 | ) | | $ | 414,405 |
|
In fiscal 2017, certain purchased intangibles associated with our acquisitions in prior years and certain other acquired rights to use technology became fully amortized and were removed from the Consolidated Balance Sheets. In fiscal 2016, purchased intangibles associated with our acquisition of EchoSign and certain other acquired rights to use technology became fully amortized and were removed from the Consolidated Balance Sheets.
Amortization expense related to purchased and other intangible assets was $153.6 million, $152.4 million, and $174.5 million for fiscal 2017, 2016 and 2015 respectively. Of these amounts, $76.1 million, $71.1 million, and $104.4 million were included in cost of sales for fiscal 2017, 2016 and 2015 respectively.
Purchased and other intangible assets are amortized over their estimated useful lives of 1 to 14 years. As of November 28, 2014December 1, 2017, we expect amortization expense in future periods to be as follows (in thousands):
| | | Fiscal Year | | Purchased Technology | | Other Intangible Assets | | Purchased Technology | | Other Intangible Assets |
| 2015 | $ | 64,804 |
| | $ | 69,356 |
| |
| 2016 | 26,399 |
| | 63,250 |
| |
| 2017 | 19,004 |
| | 53,442 |
| |
| 2018 | 2018 | 11,932 |
| | 42,557 |
| 2018 | $ | 37,984 |
| | $ | 97,726 |
|
| 2019 | 2019 | 7,428 |
| | 40,610 |
| 2019 | 34,404 |
| | 69,733 |
|
| 2020 | | 2020 | 32,111 |
| | 39,658 |
|
| 2021 | | 2021 | 7,203 |
| | 17,304 |
|
| 2022 | | 2022 | 1,117 |
| | 14,297 |
|
| Thereafter | Thereafter | 10,944 |
| | 59,936 |
| Thereafter | — |
| | 34,121 |
|
| Total expected amortization expense | Total expected amortization expense | $ | 140,511 |
| | $ | 329,151 |
| Total expected amortization expense | $ | 112,819 |
| | $ | 272,839 |
|
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8. ACCRUED EXPENSES
Accrued expenses as of November 28, 2014December 1, 2017 and November 29, 2013December 2, 2016 consisted of the following (in thousands):
| | | | 2014 | | 2013 | 2017 | | 2016 |
| Accrued compensation and benefits | $ | 320,679 |
| | $ | 318,219 |
| $ | 417,742 |
| | $ | 339,487 |
|
| Accrued media costs | | 134,525 |
| | 5,144 |
|
| Sales and marketing allowances | 75,627 |
| | 66,502 |
| 47,389 |
| | 55,681 |
|
| Accrued corporate marketing | 28,369 |
| | 22,801 |
| 72,087 |
| | 55,218 |
|
| Taxes payable | 24,658 |
| | 18,225 |
| 49,550 |
| | 43,113 |
|
| Royalties payable | 15,073 |
| | 14,778 |
| 46,411 |
| | 25,089 |
|
| Accrued interest expense | 22,621 |
| | 20,613 |
| 25,594 |
| | 25,805 |
|
| Other | 196,839 |
| | 195,801 |
| 200,475 |
| | 190,093 |
|
| Accrued expenses | $ | 683,866 |
| | $ | 656,939 |
| $ | 993,773 |
| | $ | 739,630 |
|
Accrued media costs primarily relate to our advertising platform offerings from TubeMogul, which are part of the Advertising Cloud. We accrue for media costs related to impressions purchased from third-party ad inventory sources. Other primarily includes general corporate accruals for technical support and local and regional expenses, including our accrual for a loss contingency as of November 28, 2014.expenses. Other is also comprised of deferred rent related to office locations with rent escalations and foreign currency liability derivatives.See Note 15 for further information regarding the loss contingency.
NOTE 9. INCOME TAXES
Income before income taxes for fiscal 20142017, 20132016 and 20122015 consisted of the following (in thousands): | | | | | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
| Domestic | | $ | 191,563 |
| | $ | 132,916 |
| | $ | 512,987 |
| | $ | 1,056,156 |
| | $ | 805,749 |
| | $ | 589,371 |
|
| Foreign | | 169,813 |
| | 223,225 |
| | 605,807 |
| | 1,081,485 |
| | 629,389 |
| | 284,410 |
|
| Income before income taxes | | $ | 361,376 |
| | $ | 356,141 |
| | $ | 1,118,794 |
| | $ | 2,137,641 |
| | $ | 1,435,138 |
| | $ | 873,781 |
|
The provision for income taxes for fiscal 2017, 2016 and 2015 consisted of the following (in thousands):
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Current: | | | | | | |
| United States federal | | $ | 298,802 |
| | $ | 94,396 |
| | $ | 204,834 |
|
| Foreign | | 60,962 |
| | 59,749 |
| | 52,125 |
|
| State and local | | 33,578 |
| | 15,222 |
| | (14,975 | ) |
| Total current | | 393,342 |
| | 169,367 |
| | 241,984 |
|
| Deferred: | | |
| | |
| | |
|
| United States federal | | 48,905 |
| | 33,924 |
| | (31,011 | ) |
| Foreign | | (4,242 | ) | | (2,751 | ) | | (9,368 | ) |
| State and local | | 5,682 |
| | (9,287 | ) | | (25,511 | ) |
| Total deferred | | 50,345 |
| | 21,886 |
| | (65,890 | ) |
| Tax expense attributable to employee stock plans | | — |
| | 75,103 |
| | 68,136 |
|
| Provision for income taxes | | $ | 443,687 |
| | $ | 266,356 |
| | $ | 244,230 |
|
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes for fiscal 2014, 2013 and 2012 consisted of the following (in thousands):
|
| | | | | | | | | | | | |
| | | 2014 | | 2013 | | 2012 |
| Current: | | | | | | |
| United States federal | | $ | 26,822 |
| | $ | (53,985 | ) | | $ | 162,574 |
|
| Foreign | | 51,684 |
| | 65,609 |
| | 59,255 |
|
| State and local | | 4,713 |
| | 3,317 |
| | (2,244 | ) |
| Total current | | 83,219 |
| | 14,941 |
| | 219,585 |
|
| Deferred: | | |
| | |
| | |
|
| United States federal | | (24,090 | ) | | 24,139 |
| | 69,374 |
|
| Foreign | | (12,895 | ) | | (6,215 | ) | | (6,082 | ) |
| State and local | | (6,476 | ) | | (7,328 | ) | | 3,142 |
|
| Total deferred | | (43,461 | ) | | 10,596 |
| | 66,434 |
|
| Tax expense attributable to employee stock plans | | 53,223 |
| | 40,619 |
| | — |
|
| Provision for income taxes | | $ | 92,981 |
| | $ | 66,156 |
| | $ | 286,019 |
|
Total income tax expense differs from the expected tax expense (computed by multiplying the U.S. federal statutory rate of 35% by income before income taxes) as a result of the following (in thousands):
| | | | | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
| Computed “expected” tax expense | | $ | 126,481 |
| | $ | 124,649 |
| | $ | 391,578 |
| | $ | 748,174 |
| | $ | 502,298 |
| | $ | 305,824 |
|
| State tax expense, net of federal benefit | | (4,411 | ) | | (6,304 | ) | | 11,320 |
| | 25,131 |
| | 10,636 |
| | (8,316 | ) |
| Tax credits | | (1,166 | ) | | (29,087 | ) | | (1,226 | ) | | (38,000 | ) | | (48,383 | ) | | (25,967 | ) |
| Differences between statutory rate and foreign effective tax rate | | (33,769 | ) | | (39,678 | ) | | (122,999 | ) | | (215,490 | ) | | (133,778 | ) | | (90,063 | ) |
| Change in deferred tax asset valuation allowance | | — |
| | 514 |
| | (2,144 | ) | |
| Stock-based compensation (net of tax deduction) | | 8,688 |
| | 9,783 |
| | 10,976 |
| |
| Stock-based compensation, net of tax deduction | | | (42,512 | ) | | 15,101 |
| | 9,623 |
|
| Resolution of income tax examinations | | (1,896 | ) | | (8,421 | ) | | (26,687 | ) | | (31,358 | ) | | (68,003 | ) | | (17,595 | ) |
| Domestic manufacturing deduction benefit | | (6,272 | ) | | (2,929 | ) | | (17,010 | ) | | (32,200 | ) | | (26,990 | ) | | (16,800 | ) |
| Tax charge for licensing acquired company technology to foreign subsidiaries | | — |
| | 18,935 |
| | 38,849 |
| | 24,771 |
| | 5,346 |
| | 80,015 |
|
| Other, net | | 5,326 |
| | (1,306 | ) | | 3,362 |
| | 5,171 |
| | 10,129 |
| | 7,509 |
|
| Provision for income taxes | | $ | 92,981 |
| | $ | 66,156 |
| | $ | 286,019 |
| | $ | 443,687 |
| | $ | 266,356 |
| | $ | 244,230 |
|
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Tax Assets and Liabilities
The tax effects of the temporary differences that gave rise to significant portions of the deferred tax assets and liabilities as of November 28, 2014December 1, 2017 and November 29, 2013December 2, 2016 are presented below (in thousands):
| | | | | 2014 | | 2013 | | 2017 | | 2016 |
| Deferred tax assets: | | | | | | | | |
| Acquired technology | | $ | 9,477 |
| | $ | 14,379 |
| | $ | 4,846 |
| | $ | 7,421 |
|
| Reserves and accruals | | 56,109 |
| | 67,753 |
| | 48,761 |
| | 35,440 |
|
| Deferred revenue | | 16,311 |
| | 10,218 |
| | 23,452 |
| | 21,039 |
|
| Unrealized losses on investments | | 6,723 |
| | 9,793 |
| | 11 |
| | 2,391 |
|
| Stock-based compensation | | 58,501 |
| | 64,244 |
| | 74,942 |
| | 56,353 |
|
| Net operating loss carryforwards of acquired companies | | 9,082 |
| | 9,222 |
| | 44,465 |
| | 31,305 |
|
| Credit carryforwards | | 41,419 |
| | 43,175 |
| | 124,205 |
| | 63,315 |
|
| Capitalized expenses | | — |
| | 188 |
| | 13,428 |
| | 15,571 |
|
| Benefits relating to tax positions | | | 33,318 |
| | 39,492 |
|
| Other | | 10,974 |
| | 6,788 |
| | 30,289 |
| | 26,439 |
|
| Total gross deferred tax assets | | 208,596 |
| | 225,760 |
| | 397,717 |
| | 298,766 |
|
| Deferred tax asset valuation allowance | | (22,100 | ) | | (21,493 | ) | | (93,568 | ) | | (24,265 | ) |
| Total deferred tax assets | | 186,496 |
| | 204,267 |
| | 304,149 |
| | 274,501 |
|
| Deferred tax liabilities: | | | | | | | | |
| Depreciation and amortization | | 73,295 |
| | 89,611 |
| | 84,064 |
| | 78,619 |
|
| Undistributed earnings of foreign subsidiaries | | 221,845 |
| | 211,417 |
| | 382,744 |
| | 292,844 |
|
| Acquired intangible assets | | 138,392 |
| | 176,626 |
| | 117,282 |
| | 120,698 |
|
| Total deferred tax liabilities | | 433,532 |
| | 477,654 |
| | 584,090 |
| | 492,161 |
|
| Net deferred tax liabilities | | $ | 247,036 |
| | $ | 273,387 |
| |
| Net deferred tax liabilities: | | | $ | 279,941 |
| | $ | 217,660 |
|
TheDeferred 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. Included in the deferred tax assets and liabilities for fiscal 20142017 and 2013 include2016 are amounts related to various acquisitions. The total change in deferred tax assets and liabilities includes changesare offset by a valuation allowance to the extent it is more likely than not that they are recordednot expected to OCI, additional paid-in capital, goodwill, unrecognized tax benefits and retained earnings.be realized.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We provide U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the U.S.United States. To the extent that the foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings. As of November 28, 2014,December 1, 2017, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $3.3$5.0 billion. The unrecognized deferred tax liability for these earnings is approximately $0.9$1.4 billion.
As of November 28, 2014December 1, 2017, we have net operating loss carryforwards of approximately $22.6$118.4 million for federal and $3.4$52.6 million for foreign.state. We also have federal, state and foreign tax credit carryforwards of approximately $1.6 million, $26.7$166.2 million and $22.4$16.2 million, respectively. The net operating loss carryforward assets federal tax credits and foreign tax credits will expire in various years from fiscal 20152018 through 2033.2036. The state tax credit carryforwards can be carried forward indefinitely. The net operating loss carryforward assets and certain credits are reduced by the valuation allowance and are subject to an annual limitation under Internal Revenue Code Section 382, butthe carrying amount of which are expected to be fully realized.
In addition, we have been tracking certain deferred tax attributes of $49.2 million which have not been recorded in the financial statements pursuant to accounting standards related to stock-based compensation. These amounts are no longer included in our gross or net deferred tax assets. Pursuant to these standards, the benefit of these deferred tax assets will be recorded to equity if and when they reduce taxes payable.
As of November 28, 2014December 1, 2017, a valuation allowance of $22.1$93.6 million has been established for certain deferred tax assets related to the impairment of investments and certain state and foreign assets. For fiscal 20142017, the total change in the valuation allowance was $0.6 million.$69.3 million, of which $55.3 million was related to the deferred tax attributes recorded due to our early adoption of the new accounting guidance related to stock-based compensation.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounting for Uncertainty in Income Taxes
During fiscal 20142017 and 20132016, our aggregate changes in our total gross amount of unrecognized tax benefits are summarized as follows (in thousands):
| | | | | 2014 | | 2013 | | 2017 | | 2016 |
| Beginning balance | | $ | 136,098 |
| | $ | 160,468 |
| | $ | 178,413 |
| | $ | 258,718 |
|
| Gross increases in unrecognized tax benefits – prior year tax positions | | 144 |
| | 20,244 |
| | 3,680 |
| | 6,047 |
|
| Gross decreases in unrecognized tax benefits – prior year tax positions | | | (30,166 | ) | | (67,870 | ) |
| Gross increases in unrecognized tax benefits – current year tax positions | | 18,877 |
| | 16,777 |
| | 24,927 |
| | 23,068 |
|
| Settlements with taxing authorities | | (995 | ) | | (55,851 | ) | | (3,876 | ) | | (33,265 | ) |
| Lapse of statute of limitations | | (1,630 | ) | | (4,066 | ) | | (8,819 | ) | | (8,456 | ) |
| Foreign exchange gains and losses | | (3,646 | ) | | (1,474 | ) | | 8,786 |
| | 171 |
|
| Ending balance | | $ | 148,848 |
| | $ | 136,098 |
| | $ | 172,945 |
| | $ | 178,413 |
|
As of November 28, 2014, theThe combined amount of accrued interest and penalties related to tax positions taken on our tax returns were approximately $23.6 million and $22.4 million for fiscal 2017 and 2016, respectively. These amounts were included in non-current income taxes payable was approximately $14.6 million.in their respective years.
We file income tax returns in the U.S.United States on a federal basis and in many U.S. state and foreign jurisdictions. We are subject to the continual examination of our income tax returns by the IRS and other domestic and foreign tax authorities. Our major tax jurisdictions are Ireland, California and the U.S.United States. For Ireland, California and the U.S.,United States, the earliest fiscal years open for examination are 2008, 20082010 and 2010,2013, respectively. 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 the currentthese examinations. We believe such estimates to be reasonable; however, there can be no assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.
In July 2013, a U.S. income tax examination covering fiscal 2008 and 2009 was completed. Our accrued tax and interest related to these years was $48.4 million and was previously reported in long-term income taxes payable. We settled the tax obligation resulting from this examination with cash and income tax assets totaling $41.2 million, and the resulting $7.2 million income tax benefit was recorded in the third quarter of fiscal 2013.
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 current and non-current assets, liabilities and liabilities.income taxes payable. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from $0 to approximately $5$40 million.
NOTE 10. RESTRUCTURING
Fiscal 2014 Restructuring Plan
In the fourth quarter of fiscal 2014, in order to better align our global resources for Digital Media and Digital Marketing, we initiated a restructuring plan to vacate our Research and Development facility in China and our Sales and Marketing facility in Russia. This plan consisted of reductions of approximately 350 full-time positions and we recorded restructuring charges of approximately $18.8 million related to ongoing termination benefits for the positions eliminated. During fiscal 2015, we intend to vacate both of these facilities. The amount accrued for the fair value of future contractual obligations under these operating leases was insignificant.
Other Restructuring Plans
During the past several years, we have implemented Other Restructuring Plans consisting of reductions in workforce and the consolidation of facilities to better align our resources around our business strategies. As of November 28, 2014, we considered our Other Restructuring Plans to be substantially complete. We continue to make cash outlays to settle obligations under these plans, however the current impact to our Consolidated Financial Statements is not significant.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SummarySubsequent to December 1, 2017, the “Tax Cuts and Jobs Act” (the “Act”) was enacted and included broad tax reforms that are applicable to Adobe. Under the provisions of Restructuring Plans
The following table sets forth a summary of restructuring activitiesthe Act, the U.S. corporate tax rate decreased from 35% to 21% effective January 1, 2018, our undistributed foreign earnings are subject to taxation in fiscal 2018 and are available for repatriation, and our future foreign earnings are subject to U.S. taxation. These changes will require us to remeasure our deferred tax assets and liabilities and reclassify deferred tax liabilities related to all of our restructuring plans described above during fiscal 2014 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | November 29,
2013 | | Costs Incurred | | Cash Payments | | Other Adjustments | | November 28,
2014 |
| Fiscal 2014 Restructuring Plan: | | | | | | | | | |
| Termination benefits | $ | — |
| | $ | 18,823 |
| | $ | (4,382 | ) | | $ | 20 |
| | $ | 14,461 |
|
| Cost of closing redundant facilities | — |
| | 557 |
| | (57 | ) | | (28 | ) | | 472 |
|
| Other Restructuring Plans: | | | | | | | | | |
| Termination benefits | 2,233 |
| | — |
| | (1,357 | ) | | (339 | ) | | 537 |
|
| Cost of closing redundant facilities | 11,655 |
| | 528 |
| | (5,215 | ) | | (124 | ) | | 6,844 |
|
| Total restructuring plans | $ | 13,888 |
| | $ | 19,908 |
| | $ | (11,011 | ) | | $ | (471 | ) | | $ | 22,314 |
|
Accrued restructuring charges of $22.3 million as of November 28, 2014 include $17.1 million recorded in accrued restructuring, current and $5.2 million relatedundistributed foreign earnings to long-term facilities obligations recorded in accrued restructuring, non-current on our Consolidated Balance Sheets. We expect to pay accrued termination benefits through fiscal 2015 and facilities-related liabilities under contract through fiscal 2021 of which approximately 45% will be paid through 2016.income taxes payable due over eight years.
NOTE 11.10. BENEFIT PLANS
Retirement Savings Plan
In 1987, we adopted an Employee Investment Plan, qualified under Section 401(k) of the Internal Revenue Code, which is a retirement savings plan covering substantially all of our U.S. employees, now referred to as the Adobe 401(k) Retirement Savings Plan. Under the plan, eligible employees may contribute up to 65% of their pretax or after-tax salary, subject to the Internal Revenue Service annual contribution limits. In fiscal 2014,2017, we matched 50% of the first 6% of the employee’s eligible compensation. We contributed $24.8$34.3 million, $22.3$33.4 million and $19.4$25.7 million in fiscal 2014, 20132017, 2016 and 2012,2015, respectively. Adobe isWe are under no obligation to continue matching future employee contributions and, at the Company’sour discretion, may change itsour practices at any time.
Deferred Compensation Plan
On September 21, 2006, the Board of Directors approved the Adobe Systems Incorporated Deferred Compensation Plan, effective December 2, 2006 (the “Deferred Compensation Plan”). The Deferred Compensation Plan is an unfunded, non-qualified, deferred compensation arrangement under which certain executives and members of the Board of Directors are able to defer a portion of their annual compensation. Participants may elect to contribute up to 75% of their base salary and 100% of other specified compensation, including commissions, bonuses, performance-based and time-based restricted stock units, and directors’ fees. Participants are able to elect the payment of benefits to begin on a specified date at least three years after the end of the plan year in which the election is made. For cash benefit elections, distributions are made in cash and in the form of a lump sum or annual installments over five ten or fifteen years. Upon termination of a participant’s employment with Adobe, such participant will receive a distributionFor stock benefit elections, distributions are settled in stock and in the form of a lump sum payment. All distributions will be made in cash, except for deferred performance-based and time-based restricted stock units which will be settled in stock. payment only.
As of November 28, 2014December 1, 2017 and November 29, 2013,December 2, 2016, the invested amounts under the Deferred Compensation Plan total $25.7$56.7 million and $19.8$42.2 million,, respectively and were recorded as other assets on our Consolidated Balance Sheets. As of November 28, 2014December 1, 2017 and November 29, 2013, $31.0December 2, 2016, $67.2 million and $22.049.0 million, respectively, was recorded as long-term liabilities to recognize undistributed deferred compensation due to employees.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12.11. STOCK-BASED COMPENSATION
Our stock-based compensation programs are long-term retention programs that are intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. We have the following stock-based compensation plans and programs:
Restricted Stock Unit PlansPlan
We grant restricted stock units to all eligible employees under our 2003 Equity Incentive Plan, as amended (“2003 Plan”), and our 2005 Equity Incentive Assumption Plan (“2005 Assumption Plan”). Restricted stock units granted under these plans as part of our annual review process or for promotions vest annually over three years. Other restrictedRestricted stock units granted under these plansto new hires generally vest over four years, the majority of which vest 25% annually.years. Certain grants have other vesting periods approved by our Board of Directors or an authorized committee of the Board of Directors.committee.
We grant performance awards to officers and key employees under our 2003 Plan. Performance awards granted under these plans from fiscal 2009 to fiscal 2012 vest annually over three years, and performance awards granted in fiscal 2013 and 2014Plan which cliff-vest after three years. Performance awards granted prior to fiscal 2009 vest annually over four years.
As of November 28, 2014December 1, 2017, we had reserved 163.2 million and 5.7183.2 million shares of common stock for issuance under our 2003 Plan and 2005 Assumption Plan, respectively, and had 45.7 million and 28.693.6 million shares available for grant under our 2003 Plan and 2005 Assumption Plan, respectively.grant.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employee Stock Purchase Plan
Our 1997 Employee Stock Purchase Plan (“ESPP”) allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions. The ESPP consists of a twenty-four month offering period with four six-month purchase periods in each offering period. Employees purchase shares in each purchase period at 85% of the market value of our common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower. The ESPP will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued.
As of November 28, 2014December 1, 2017, we had reserved 93.0 million shares of our common stock for issuance under the ESPP and approximately 12.97.0 million shares remain available for future issuance.
Stock Option PlansPlan
The 2003 Plan and the 2005 Assumption Plan allows us to grant options to all employees, including executive officers, outside consultants and non-employee directors. These plansThis plan will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued and restrictions on issued shares have lapsed. Option vesting periods areused in the past were generally four years for all of these plans. Options granted under these plans generallyand expire seven years from the effective date of grant.
The Executive Compensation Committee of Adobe’s Board of DirectorsWe eliminated the use of stock option grants for all employees ineffective fiscal 2012. Stock option grants to2012, and for all of the non-employee directors were minimaleffective fiscal 2014, but may choose to issue stock options in fiscal 2013, and in December 2013 the Board of Directors eliminated the use of options for directors going forward.future.
Performance Share Programs
On January 24, 2014, ourOur 2017, 2016 and 2015 Performance Share Programs aim to help focus key employees on building stockholder value, provide significant award potential for achieving outstanding Company performance and enhance the ability of the Company to attract and retain highly talented and competent individuals. The Executive Compensation Committee approvedof our Board of Directors approves the 2014terms of each of our Performance Share Program,Programs, including the award calculation methodology, under the terms of our 2003 Equity Incentive Plan. Under our 2014 Performance Share Program (“2014 Program”), sharesShares may be earned based on the achievement of an objective relative total stockholder return measured over a three-year performance period. The purpose of the 2014 Program is to help focus key employees on building stockholder value, provide significant award potential for achieving outstanding company performance and enhance the ability of Adobe to attract and retain highly talented and competent individuals. Performance share awards will be awarded and fully vest upon the later of the Executive Compensation Committee’sCommittee's certification of the level of achievement followingor the three-year anniversary of the grant date on January 24, 2017. Participants in the 2014each grant. Program participants generally have the ability to receive up to 200% of the target number of shares originally granted.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Issuance of Shares
Upon exercise of stock options, vesting of restricted stock units and performance shares, and purchases of shares under the ESPP, we will issue treasury stock. If treasury stock is not available, common stock will be issued. In order to minimize the impact of on-going dilution from exercises of stock options and vesting of restricted stock units and performance shares, we instituted a stock repurchase program. See Note 1312 for information regarding our stock repurchase programs. Valuation of Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award.
Our performance share awards are valued using a Monte Carlo Simulation model. The fair value of the awards are fixed at grant date and amortized over the longer of the remaining performance or service period.
We use the Black-Scholes option pricing model to determine the fair value of stock options and ESPP shares. The determination of the fair value of stock-based payment awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, a risk-free interest rate and any expected dividends.
We estimate the expected term of options granted by calculating the average term from our historical stock option exercise experience. We estimate the volatility of our common stock by using implied volatility in market traded options. Our decision to use implied volatility was based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. We base the risk-free interest rate that we use in the option valuation model on zero-coupon yields implied by U.S. Treasury issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
We eliminated the use of stock option grants for all employees effective fiscal 2012, and for all of the non-employee directors effective fiscal 2014. The assumptions used to value our option grants prior to fiscal 2014 were as follows:ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | |
| | Fiscal Years |
| | 2013 | | 2012 |
| Expected life (in years) | 3.2 |
| | 3.9 - 4.2 |
| Volatility | 27 | % | | 31 - 34% |
| Risk free interest rate | 0.36 | % | | 0.54 - 0.71% |
The expected term of ESPP shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights were as follows:
| | | | Fiscal Years | | | | | |
| | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Expected life (in years) | 0.5 - 2.0 | | 0.5 - 2.0 | | 0.5 - 2.0 | 0.5 - 2.0 | | 0.5 - 2.0 | | 0.5 - 2.0 |
| Volatility | 26 - 28% | | 26 - 30% | | 30 - 36% | 22% - 27% | | 26% - 29% | | 26% - 30% |
| Risk free interest rate | 0.06 - 0.47% | | 0.09 - 0.34% | | 0.06 - 0.30% | 0.62% - 1.41% | | 0.37% - 1.06% | | 0.11% - 0.67% |
We recognize the estimated compensation cost of restricted stock awards and restricted stock units, net of estimated forfeitures, over the vesting term. The estimated compensation cost is based on the fair value of our common stock on the date of grant.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We recognize the estimated compensation cost of performance shares, net of estimated forfeitures. The fiscal 2014 and 2013 awards are earned upon achievement of an objective total stockholder return measure at the end of the three-year performance period, as described above. The fair value of the awards was fixed at grant date and will be amortized over the longer of the remaining performance or service period. In previous years, the awards were earned upon attainment of identified performance goals, some of which contained discretionary metrics. As such, these awards were measured based on our traded stock price at the end of each reporting period until achieved. The fair value of the awards were based on the achievement date and amortized over the longer of the remaining performance or service period.
Summary of Restricted Stock Units
Restricted stock unit activity for fiscal 20142017, 20132016 and 20122015 was as follows (in thousands):
| | | | 2014 | | 2013 | | 2012 | 2017 | | 2016 | | 2015 |
| Beginning outstanding balance | 17,948 |
| | 18,415 |
| | 16,871 |
| 8,316 |
| | 10,069 |
| | 13,564 |
|
| Awarded | 4,413 |
| | 7,236 |
| | 9,431 |
| 5,018 |
| | 4,440 |
| | 4,012 |
|
| Released | (7,502 | ) | | (6,224 | ) | | (5,854 | ) | (3,859 | ) | | (5,471 | ) | | (6,561 | ) |
| Forfeited | (1,295 | ) | | (1,479 | ) | | (2,147 | ) | (766 | ) | | (722 | ) | | (946 | ) |
| Increase due to acquisition | — |
| | — |
| | 114 |
| 595 |
| | — |
| | — |
|
| Ending outstanding balance | 13,564 |
| | 17,948 |
| | 18,415 |
| 9,304 |
| | 8,316 |
| | 10,069 |
|
The weighted average grant date fair values of restricted stock units granted during fiscal 2014, 20132017, 2016 and 20122015 were $61.16, $39.87$120.33, $89.87 and $31.36,$75.47, respectively. The total fair value of restricted stock units vested during fiscal 2014, 20132017, 2016 and 20122015 was $457.3$472.0 million, $249.5$499.8 million and $180.1$495.1 million, respectively.
Information regarding restricted stock units outstanding at November 28, 2014December 1, 2017, November 29, 2013December 2, 2016 and November 30, 201227, 2015 is summarized below:
| | | | Number of Shares (thousands) | | Weighted Average Remaining Contractual Life (years) | | Aggregate Intrinsic Value(*) (millions) | Number of Shares (thousands) | | Weighted Average Remaining Contractual Life (years) | | Aggregate Intrinsic Value(*) (millions) |
| 2014 | | | | | | |
| 2017 | | | | | | |
| Restricted stock units outstanding | 13,564 |
| | 0.94 | | $ | 999.4 |
| 9,304 |
| | 1.11 | | $ | 1,670.2 |
|
| Restricted stock units vested and expected to vest | 12,352 |
| | 0.87 | | $ | 903.1 |
| 8,608 |
| | 1.05 | | $ | 1,545.3 |
|
| 2013 | |
| | | | |
| |
| 2016 | | |
| | | | |
|
| Restricted stock units outstanding | 17,948 |
| | 1.09 | | $ | 1,019.1 |
| 8,316 |
| | 1.11 | | $ | 829.4 |
|
| Restricted stock units vested and expected to vest | 16,265 |
| | 1.02 | | $ | 920.5 |
| 7,613 |
| | 1.04 | | $ | 759.3 |
|
| 2012 | | | | |
| 2015 | | | | |
| Restricted stock units outstanding | 18,415 |
| | 1.37 | | $ | 637.3 |
| 10,069 |
| | 0.93 | | $ | 928.0 |
|
| Restricted stock units vested and expected to vest | 16,289 |
| | 1.26 | | $ | 562.8 |
| 9,267 |
| | 0.86 | | $ | 842.9 |
|
_________________________________________
| |
(*) | The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of November 28, 2014December 1, 2017, November 29, 2013December 2, 2016 and November 30, 201227, 2015 were $73.68, $56.78$179.52, $99.73 and $34.61,$92.17, respectively. |
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary of Performance Shares
As of November 28, 2014, the shares awarded under our 2013 and 2014 Performance Share Programs are yet to be achieved.The following table sets forth the summary of performance share activity under our 2013 and 2014 Performance Share Programs for the fiscal year ended November 28, 2014 (in thousands):
|
| | | | | | | | | | | |
| | 2014 | | 2013 |
| | Shares Granted | | Maximum Shares Eligible to Receive | | Shares Granted | | Maximum Shares Eligible to Receive |
| Beginning outstanding balance | 854 |
| | 1,707 |
| | — |
| | — |
|
| Awarded | 709 |
| | 1,417 |
| | 946 |
| | 1,891 |
|
| Forfeited | (46 | ) | | (90 | ) | | (92 | ) | | (184 | ) |
| Ending outstanding balance | 1,517 |
| | 3,034 |
| | 854 |
| | 1,707 |
|
In the first quarter of fiscal 2013,2017, the Executive Compensation Committee certified the actual performance achievement of participants in the 20122014 Performance Share Program (the “2012 Program”). Based upon the achievement of specific and/or market-based performance goals outlined in the 2012 Program, participants had the ability to receive up to 150% of the target number of shares originally granted.Program. Actual performance resulted in participants achieving 116%198% of target or approximately 1.30.6 million additional shares. The shares for the 2012 Program. One third of the sharesgranted and achieved under the 20122014 Performance Share Program fully vested in the first quarter of fiscal 2013 and the remaining two thirds vest evenly on the following two anniversariesthree-year anniversary of the grant contingent upon the recipient’s continued service to Adobe.on January 24, 2017, if not forfeited.
In the first quarter of fiscal 2012,2016, the Executive Compensation Committee certified the actual performance achievement of participants in the 20112013 Performance Share Program (the “2011 Program”). Based upon the achievement of goals outlined in the 2011 Program, participants had the ability to receive up to 150% of the target number of shares originally granted.Program. Actual performance resulted in participants achieving 130%198% of target or approximately 0.50.7 million additional shares. The shares for the 2011 Program. One-third of the sharesgranted and achieved under the 20112013 Performance Share Program fully vested in the first quarter of fiscal 2012 and the remaining two-thirds vest evenly on the following two annualthree-year anniversary dates of the grant contingent uponon January 24, 2016, if not forfeited. As of December 1, 2017, the recipient’s continued serviceshares awarded under our 2017, 2016 and 2015 Performance Share Programs are yet to Adobe.be achieved.
The following table sets forth the summary of performancePerformance share activity under our 2010, 2011 and 2012 programs, based upon share awards actually achieved, for the fiscal years ended November 28, 20142017, November 29, 20132016 and November 30, 20122015 was as follows (in thousands):
| | | | | | | | | 2017 | | 2016 | | 2015 |
| | 2014 | | 2013 | | 2012 | Shares Granted | | Maximum Shares Eligible to Receive | | Shares Granted | | Maximum Shares Eligible to Receive | | Shares
Granted | | Maximum
Shares Eligible
to Receive |
| Beginning outstanding balance | 861 |
| | 388 |
| | 405 |
| 1,630 |
| | 3,261 |
| | 1,940 |
| | 3,881 |
| | 1,517 |
| | 3,034 |
|
| Awarded | | 1,082 |
| (1) | 1,040 |
| | 1,206 |
| (2) | 1,053 |
| | 671 |
| | 1,342 |
|
| Achieved | — |
| | 1,279 |
| | 492 |
| (1,135 | ) | (3) | (1,147 | ) | | (1,373 | ) | (3) | (1,387 | ) | | — |
| | — |
|
| Released | (486 | ) | | (665 | ) | | (464 | ) | |
| Forfeited | (21 | ) | | (141 | ) | | (45 | ) | (43 | ) | | (86 | ) | | (143 | ) | | (286 | ) | | (248 | ) | | (495 | ) |
| Ending outstanding balance | 354 |
| | 861 |
| | 388 |
| 1,534 |
| | 3,068 |
| | 1,630 |
| | 3,261 |
| | 1,940 |
| | 3,881 |
|
_________________________________________
| |
(1) | Included in the 1.1 million shares awarded during fiscal 2017 were 0.6 million additional shares awarded for the final achievement of the 2014 Performance Share program. The remaining awarded shares were for the 2017 Performance Share Program. |
| |
(2) | Included in the 1.2 million shares awarded during fiscal 2016 were 0.7 million additional shares awarded for the final achievement of the 2013 Performance Share program. The remaining awarded shares were for the 2016 Performance Share Program. |
| |
(3) | Shares achieved under our 2014 and 2013 Performance Share programs which resulted from 198% achievement of target for both programs. |
The total fair value of performance awards vested during fiscal 20142017, 20132016 and 20122015 was $28.7$127.4 million, $25.4123.1 million and $14.426.1 million, respectively.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information regarding performance shares outstanding at November 28, 2014, November 29, 2013 and November 30, 2012 is summarized below:
|
| | | | | | | | |
| | Number of Shares (thousands) | | Weighted Average Remaining Contractual Life (years) | | Aggregate Intrinsic Value(*) (millions) |
| 2014 | | | | | |
| Performance shares outstanding | 354 |
| | 0.16 | | $ | 26.1 |
|
| Performance shares vested and expected to vest | 348 |
| | 0.16 | | $ | 25.5 |
|
| 2013 | |
| | | | |
|
| Performance shares units outstanding | 861 |
| | 0.58 | | $ | 48.9 |
|
| Performance shares vested and expected to vest | 817 |
| | 0.56 | | $ | 46.3 |
|
| 2012 | | | | | |
| Performance shares units outstanding | 388 |
| | 0.54 | | $ | 13.4 |
|
| Performance shares vested and expected to vest | 369 |
| | 0.51 | | $ | 12.7 |
|
_________________________________________
| |
(*)
| The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of November 28, 2014, November 29, 2013 and November 30, 2012 were $73.68, $56.78 and $34.61, respectively.
|
Summary of Employee Stock Purchase Plan Shares
The weighted average subscription date fair value of shares under the ESPP during fiscal 20142017, 20132016 and 20122015 were $17.02,$29.86, $11.4024.84 and $9.0920.81, respectively. Employees purchased 2.91.9 million shares at an average price of $34.76,$77.63, 3.41.9 million shares at an average price of $25.7166.13, and 3.22.1 million shares at an average price of $23.8152.37, respectively, for fiscal 20142017, 20132016 and 20122015. The intrinsic value of shares purchased during fiscal 20142017, 20132016 and 20122015 was $93.4$97.7 million, $58.554.3 million and $22.853.9 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary of Stock Options
There were no stock option grants during fiscal 2014. Stock option activity under our stock option program for fiscal 2014, 2013As of December 1, 2017 and 2012 was as follows (shares in thousands):
|
| | | | | | |
| | Outstanding Options |
| | Number of Shares | | Weighted Average Exercise Price |
| December 2, 2011 | 34,802 |
| | $ | 31.47 |
|
| Granted | 57 |
| | $ | 32.19 |
|
| Exercised | (6,754 | ) | | $ | 23.61 |
|
| Cancelled | (4,692 | ) | | $ | 33.07 |
|
| Increase due to acquisition | 1,104 |
| | $ | 3.23 |
|
| November 30, 2012 | 24,517 |
| | $ | 32.09 |
|
| Granted | 25 |
| | $ | 45.03 |
|
| Exercised | (15,872 | ) | | $ | 32.15 |
|
| Cancelled | (1,584 | ) | | $ | 37.37 |
|
| Increase due to acquisition | 273 |
| | $ | 6.82 |
|
| November 29, 2013 | 7,359 |
| | $ | 29.93 |
|
| Granted | — |
| | $ | — |
|
| Exercised | (4,055 | ) | | $ | 30.88 |
|
| Cancelled | (153 | ) | | $ | 25.37 |
|
| Increase due to acquisition | 22 |
| | $ | 29.44 |
|
| November 28, 2014 | 3,173 |
| | $ | 28.92 |
|
The weighted average fair values of options granted during fiscal 2013December 2, 2016, we had 0.3 million and 2012 were $8.64 and $8.50, respectively.
The total intrinsic value of options exercised during fiscal 2014, 2013 and 2012 was $141.30.6 million$181.8 million and $62.6 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information regarding stock options outstanding, at November 28, 2014, November 29, 2013 and November 30, 2012 is summarized below:respectively.
Grants to Executive Officers
|
| | | | | | | | | | | | |
| | Number of Shares (thousands) | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (years) | | Aggregate Intrinsic Value(*) (millions) |
| 2014 | | | | | | | |
| Options outstanding | 3,173 |
| | $ | 28.92 |
| | 3.19 | | $ | 142.0 |
|
| Options vested and expected to vest | 3,153 |
| | $ | 29.00 |
| | 3.17 | | $ | 140.9 |
|
| Options exercisable | 2,786 |
| | $ | 30.24 |
| | 2.85 | | $ | 121.0 |
|
| 2013 | |
| | |
| | | | |
|
| Options outstanding | 7,359 |
| | $ | 29.93 |
| | 3.22 | | $ | 197.6 |
|
| Options vested and expected to vest | 7,242 |
| | $ | 30.05 |
| | 3.18 | | $ | 193.6 |
|
| Options exercisable | 5,752 |
| | $ | 31.28 |
| | 2.65 | | $ | 146.7 |
|
| 2012 | | | | | | | |
| Options outstanding | 24,517 |
| | $ | 32.09 |
| | 2.74 | | $ | 103.3 |
|
| Options vested and expected to vest | 24,158 |
| | $ | 32.15 |
| | 2.70 | | $ | 100.9 |
|
| Options exercisable | 20,668 |
| | $ | 33.06 |
| | 2.27 | | $ | 73.6 |
|
_________________________________________
| |
(*)
| The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of November 28, 2014, November 29, 2013 and November 30, 2012 were $73.68, $56.78 and $34.61, respectively.
|
All equity awards granted to current executive officers are made after a review by and with the approval of the Executive Compensation Committee of the Board of Directors.
Grants to Non-Employee Directors
TheAlthough the 2003 Plan (and prior to fiscal 2008, the Directors Plan) provides for the granting of non-qualified stock options and restricted stock units to non-employee directors.directors, restricted stock units are the primary form of our grants to non-employee directors since fiscal 2014. The initial equity grant to a new non-employee director is a restricted stock unit award having an aggregate value of $0.50.3 million based on the average stock price over the 30 calendar days ending on the day before the date of grant.grant and vest 100% on the day preceding the next annual meeting. The initial equity award vests annually over 2 years. Non-employee directors receiving initial equity grantsactual target grant value will not be eligible to receive annual equity grants untilprorated based on the secondnumber of days remaining before the next annual meeting after joiningor the Boarddate of Directors.the first anniversary of our last annual meeting if the next annual meeting is not yet scheduled.
Annual equity grants to non-employee directors in the form of restricted stock units shall have an aggregate value of $0.3 million as based on the average stock price over the 30 calendar days ending on the day before the date of grant and vest 100% on the day preceding the next annual meeting. Starting in fiscal 2014, we eliminated the use of non-qualified stock options for our non-employee directors and restricted stock units became the primary form of their annual equity grants. Prior to fiscal 2014, a non-employee director could elect to receive the annual equity grant as either 100% options, 100% restricted stock units or 50% of each. The target grant value converted to stock options was based on a 1:3 conversion of restricted stock units to stock options.
Restricted stock units granted to directors for fiscal 20142017, 20132016 and 20122015 were as follows (in thousands): |
| | | | | | | | |
| | 2014 | | 2013 | | 2012 |
| Restricted stock units granted to existing directors | 48 |
| | 36 |
| | 42 |
|
| Restricted stock units granted to new directors | — |
| | 14 |
| | 41 |
|
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Non-employee director options granted in fiscal 2013 and 2012 as part of the annual equity awards process vested 100% on the day preceding the fiscal 2014 and fiscal 2013 annual meeting, respectively, and had a seven-year term. The exercise price of the options issued were equal to the fair market value of our common stock on the date of grant. Options granted to directors for fiscal 2013 and 2012 were as follows (shares in thousands):
|
| | | | | | | |
| | 2013 | | 2012 |
| Options granted to existing directors | 25 |
| | 43 |
|
| Exercise price | $ | 45.03 |
| | $ | 33.18 |
|
|
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Restricted stock units granted to existing directors | 18 |
| | 25 |
| | 41 |
|
Compensation Costs
WithWe recognize the exceptionestimated compensation cost of performance shares, stock-based compensation expense is recognizedrestricted stock units, net of estimated forfeitures, on a straight-line basis over the requisite service period of the entire award, which is generally the vesting period. ForThe estimated compensation cost is based on the fair value of our common stock on the date of grant.
We recognize the estimated compensation cost of performance shares, expense is recognizednet of estimated forfeitures, on a straight-line basis over the requisite service period for each vesting tranche of the entire award. The fiscal 2017, 2016 and 2015 awards are earned upon achievement of an objective total stockholder return measure at the end of the three-year performance period, as described above.
We estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
As of November 28, 2014December 1, 2017, there was $414.5$708.3 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 1.61.8 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total stock-based compensation costs that have been included in our Consolidated Statements of Income for fiscal 20142017, 20132016 and 20122015 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Income Statement Classifications |
| | Cost of Revenue– Subscription | | Cost of Revenue– Services and Support | | Research and Development | | Sales and Marketing | | General and Administrative | | Total(1) |
Option Grants and Stock Purchase Rights | | | | | | | | | | | |
| 2014 | $ | 1,855 |
| | $ | 4,000 |
| | $ | 15,125 |
| | $ | 17,706 |
| | $ | 6,476 |
| | $ | 45,162 |
|
| 2013 | $ | 2,059 |
| | $ | 3,413 |
| | $ | 18,188 |
| | $ | 21,283 |
| | $ | 8,410 |
| | $ | 53,353 |
|
| 2012 | $ | 2,840 |
| | $ | 4,130 |
| | $ | 24,823 |
| | $ | 31,379 |
| | $ | 15,455 |
| | $ | 78,627 |
|
Restricted Stock and Performance Share Awards | |
| | |
| | |
| | |
| | |
| | |
|
| 2014 | $ | 5,878 |
| | $ | 6,619 |
| | $ | 107,029 |
| | $ | 102,909 |
| | $ | 66,104 |
| | $ | 288,539 |
|
| 2013 | $ | 5,052 |
| | $ | 6,961 |
| | $ | 102,464 |
| | $ | 101,423 |
| | $ | 59,734 |
| | $ | 275,634 |
|
| 2012 | $ | 3,100 |
| | $ | 9,461 |
| | $ | 83,349 |
| | $ | 76,359 |
| | $ | 47,606 |
| | $ | 219,875 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Income Statement Classifications |
| | Cost of Revenue– Subscription | | Cost of Revenue– Services and Support | | Research and Development | | Sales and Marketing | | General and Administrative | | Total(1) |
Option Grants and Stock Purchase Rights | | | | | | | | | | | |
| 2017 | $ | 180 |
| | $ | 6,661 |
| | $ | 20,126 |
| | $ | 18,592 |
| | $ | 4,973 |
| | $ | 50,532 |
|
| 2016 | $ | 1,474 |
| | $ | 5,514 |
| | $ | 13,932 |
| | $ | 16,534 |
| | $ | 4,371 |
| | $ | 41,825 |
|
| 2015 | $ | 1,449 |
| | $ | 5,185 |
| | $ | 14,082 |
| | $ | 18,360 |
| | $ | 4,790 |
| | $ | 43,866 |
|
Restricted Stock Units and Performance Share Awards | |
| | |
| | |
| | |
| | |
| | |
|
| 2017 | $ | 16,792 |
| | $ | 9,602 |
| | $ | 161,366 |
| | $ | 139,047 |
| | $ | 77,133 |
| | $ | 403,940 |
|
| 2016 | $ | 6,632 |
| | $ | 7,522 |
| | $ | 109,249 |
| | $ | 113,757 |
| | $ | 70,312 |
| | $ | 307,472 |
|
| 2015 | $ | 6,481 |
| | $ | 6,446 |
| | $ | 104,624 |
| | $ | 109,908 |
| | $ | 66,709 |
| | $ | 294,168 |
|
_________________________________________
| |
(1) | During fiscal 20142017, 20132016 and 20122015, we recorded tax benefits of $72.4$153.2 million, $70.771.7 million and $61.568.8 million, respectively. |
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13.12. STOCKHOLDERS’ EQUITY
Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) and activity, net of related taxes, for fiscal 20142017 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | November 29,
2013 | | Increase / Decrease | | Reclassification Adjustments | | November 28,
2014 |
| Net unrealized gains on available-for-sale securities: | | | | | | | |
| Unrealized gains on available-for-sale securities | $ | 10,178 |
| | $ | 2,084 |
| | $ | (4,025 | ) | | $ | 8,237 |
|
| Unrealized losses on available-for-sale securities | (937 | ) | | 231 |
| | 97 |
| | (609 | ) |
| Total net unrealized gains on available-for-sale securities | 9,241 |
| | 2,315 |
| | (3,928 | ) | (1 | ) | 7,628 |
|
Net unrealized gains on derivative instruments designated as hedging instruments | 5,367 |
| | 41,993 |
| | (18,705 | ) | (2 | ) | 28,655 |
|
| Cumulative foreign currency translation adjustments | 31,495 |
| | (75,872 | ) | | — |
| | (44,377 | ) |
Total accumulated other comprehensive income (loss), net of taxes | $ | 46,103 |
| | $ | (31,564 | ) | | $ | (22,633 | ) | | $ | (8,094 | ) |
|
| | | | | | | | | | | | | | | | |
| | December 2,
2016 | | Increase / Decrease | | Reclassification Adjustments | | December 1,
2017 |
| Net unrealized gains / losses on available-for-sale securities: | | | | | | | |
| Unrealized gains on available-for-sale securities | $ | 3,499 |
| | $ | 878 |
| | $ | (1,673 | ) | | $ | 2,704 |
|
| Unrealized losses on available-for-sale securities | (11,565 | ) | | (3,381 | ) | | 726 |
| | (14,220 | ) |
| Total net unrealized gains / losses on available-for-sale securities | (8,066 | ) | | (2,503 | ) | | (947 | ) | (1 | ) | (11,516 | ) |
| Net unrealized gains / losses on derivative instruments designated as hedging instruments | 21,689 |
| | 6,917 |
| | (31,973 | ) | (2 | ) | (3,367 | ) |
| Cumulative foreign currency translation adjustments | (187,225 | ) | | 90,287 |
| | — |
| | (96,938 | ) |
| Total accumulated other comprehensive income (loss), net of taxes | $ | (173,602 | ) | | $ | 94,701 |
| | $ | (32,920 | ) | | $ | (111,821 | ) |
_________________________________________
| |
(1) | ClassifiedReclassification adjustments for gains / losses on available-for-sale securities are classified in interest and other income (expense), net. |
| |
(2) | Classified asReclassification adjustments for gains / losses on other derivative instruments are classified in revenue. |
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the taxes related to each component of other comprehensive income for fiscal 20142017, 20132016 and 20122015 (in thousands):
| | | | | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
| Available-for-sale securities: | | | | | | | | | | | | |
| Unrealized gains / losses | | $ | 1 |
| | $ | 169 |
| | $ | (686 | ) | | $ | 663 |
| | $ | (299 | ) | | $ | (154 | ) |
| Reclassification adjustments | | (8 | ) | | (2 | ) | | (1 | ) | | (491 | ) | | 108 |
| | — |
|
| Subtotal available-for-sale securities | | (7 | ) | | 167 |
| | (687 | ) | | 172 |
| | (191 | ) | | (154 | ) |
| Derivatives designated as hedging instruments: | | | | | | | | | | | | |
| Unrealized gains on derivative instruments* | | — |
| | — |
| | — |
| |
| Reclassification adjustments* | | — |
| | — |
| | — |
| |
Unrealized gains on derivative instruments* | | | — |
| | — |
| | 6,147 |
|
Reclassification adjustments* | | | (732 | ) | | (552 | ) | | (550 | ) |
| Subtotal derivatives designated as hedging instruments | | — |
| | — |
| | — |
| | (732 | ) | | (552 | ) | | 5,597 |
|
| Foreign currency translation adjustments | | (1,868 | ) | | 2,789 |
| | (1,314 | ) | | 3,005 |
| | 24 |
| | (3,378 | ) |
| Total taxes, other comprehensive income (loss) | | $ | (1,875 | ) | | $ | 2,956 |
| | $ | (2,001 | ) | | $ | 2,445 |
| | $ | (719 | ) | | $ | 2,065 |
|
_________________________________________
| |
(*) | Taxes related to derivative instruments other than the interest rate lock agreement were zero for all fiscal years based on the tax jurisdiction where thethese derivative instruments were executed. |
Stock Repurchase Program
We are currently repurchasing common stock underTo facilitate our $2.0 billion authority granted by our Board of Directors in April 2012.
Subsequent to November 28, 2014, as part of our $2.0 billion stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we enteredmay repurchase shares in the open market or enter into a structured stock repurchase agreementagreements with a large financial institution whereupon we provided them with a prepayment of $200.0 million. This amount will be classified as treasury stock onthird parties. In January 2017, our Consolidated Balance Sheets. Upon completion of the $200.0 million stock repurchase agreement, there is no remaining balance under our current authority.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Subsequent to November 28, 2014, the Board of Directors approved a new stock repurchase program granting the companyus authority to repurchase up to $2.0$2.5 billion in common stock through the end of fiscal 2017. 2019. The new stock repurchase program approved by our Board of Directors is similar to our previous $2.0 billion stock repurchase program.programs.
During fiscal 2014, 20132017, 2016 and 2012,2015, we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling $600.0 million, $1.1$1.10 billion, $1.08 billion, and $405.0$625 million, respectively. The $600.0 million and $1.1 billion prepayments during fiscal 2014 and 2013 were under the $2.0 billion stock repurchase authority. Of the $405.0 million of prepayments during fiscal 2012, $100.0 million were under the $2.0 billion stock repurchase program and the remaining $305.0 million were under our previous $1.6 billion stock repurchase authority. 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 higher than our estimate of 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 fiscal 2014,2017, we repurchased approximately 10.9 million shares at an average price of $63.48 through structured repurchase agreements entered into during fiscal 2014 and fiscal 2013. During fiscal 2013, we repurchased approximately 21.6 million shares at an average price of $46.47 through structured repurchase agreements entered into during fiscal 2013 and fiscal 2012. During fiscal 2012, we repurchased approximately 11.58.2 million shares at an average price per share of $32.29$134.20 through structured repurchase agreements entered into during fiscal 2012.2017 and fiscal 2016. During fiscal 2016, we repurchased approximately 10.4 million shares at an average price per share of $97.16 through structured repurchase agreements entered into during fiscal 2016 and fiscal 2015. During fiscal 2015, we repurchased approximately 8.1 million shares at an average price per share of $77.38 through structured repurchase agreements entered into during fiscal 2015 and fiscal 2014.
For fiscal 2014, 20132017, 2016 and 2012,2015, the prepayments were classified as treasury stock on our Consolidated Balance Sheets at the payment date, though only shares physically delivered to us by November 28, 2014, November 29, 2013December 1, 2017, December 2, 2016 and November 30, 201227, 2015 were excluded from the computation of earnings per share. As of November 28, 2014, $40.3December 1, 2017, $101.5 million of prepayments remained under the agreement.
Subsequent to December 1, 2017, as part of the 2017 stock repurchase authority, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $300 million. This amount will be classified as treasury stock on our Consolidated Balance Sheets. Upon completion of the $300 million stock repurchase agreement, $1.6 billion remains under our current authority.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14.13. NET INCOME PER SHARE
Basic net income per share is computed using the weighted average number of common shares outstanding for the period, excluding unvested restricted stock.stock units and performance awards. Diluted net income per share is based upon the weighted average common shares outstanding for the period plus dilutive potential common shares, including unvested restricted stock units, performance share awards, and stock options using the treasury stock method.
The following table sets forth the computation of basic and diluted net income per share for fiscal 20142017, 20132016 and 20122015 (in thousands, except per share data):
| | | | | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
| Net income | | $ | 268,395 |
| | $ | 289,985 |
| | $ | 832,775 |
| | $ | 1,693,954 |
| | $ | 1,168,782 |
| | $ | 629,551 |
|
| Shares used to compute basic net income per share | | 497,867 |
| | 501,372 |
| | 494,731 |
| | 493,632 |
| | 498,345 |
| | 498,764 |
|
| Dilutive potential common shares: | | | | | | | | | | | | |
| Unvested restricted stock and performance share awards | | 8,586 |
| | 8,736 |
| | 7,624 |
| |
| Unvested restricted stock units and performance share awards | | | 7,161 |
| | 5,455 |
| | 7,389 |
|
| Stock options | | 2,027 |
| | 3,368 |
| | 366 |
| | 330 |
| | 499 |
| | 1,011 |
|
| Shares used to compute diluted net income per share | | 508,480 |
| | 513,476 |
| | 502,721 |
| | 501,123 |
| | 504,299 |
| | 507,164 |
|
| Basic net income per share | | $ | 0.54 |
| | $ | 0.58 |
| | $ | 1.68 |
| | $ | 3.43 |
| | $ | 2.35 |
| | $ | 1.26 |
|
| Diluted net income per share | | $ | 0.53 |
| | $ | 0.56 |
| | $ | 1.66 |
| | $ | 3.38 |
| | $ | 2.32 |
| | $ | 1.24 |
|
For fiscal 20142017, 2016, and 2013,2015 there were no options to purchase shares of common stock with exercise prices greater than the average fair market value of our stock of $65.93$138.71, $96.39, and $45.08,$79.22, respectively, were not included in the calculation because the effectthat would have been anti-dilutive. The number of shares of common stock under these options was immaterial. For fiscal 2012, options to purchase approximately 19.4 million shares of common stock with exercise prices greater than the annual average fair market value of our stock of $31.98 were not included in the calculation because the effect would have been anti-dilutive.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15.14. COMMITMENTS AND CONTINGENCIES
Lease Commitments
We lease certain of our facilities and some of our equipment under non-cancellable operating lease arrangements that expire at various dates through 2028.2031. We also have one land lease that expires in 2091. Rent expense includes base contractual rent and variable costs such as building expenses, utilities, taxes, insurance and equipment rental. Rent expense and sublease income for these leases for fiscalwas approximately $115.4 million 2014, 2013in fiscal 2017 and $92.9 million 2012in both were as follows (in thousands):fiscal 2016 and 2015. Our sublease income was immaterial for all periods presented.
|
| | | | | | | | | | | | |
| | | 2014 | | 2013 | | 2012 |
| Rent expense | | $ | 111,149 |
| | $ | 118,976 |
| | $ | 105,809 |
|
| Less: sublease income | | 1,412 |
| | 3,057 |
| | 2,330 |
|
| Net rent expense | | $ | 109,737 |
| | $ | 115,919 |
| | $ | 103,479 |
|
We occupy three office buildings in San Jose, California where our corporate headquarters are located. We reference these office buildings as the Almaden, Tower and the East and West Towers.
In August 2014,March 2017, we exercised our option to purchase the East and West TowersAlmaden Tower for a total purchase price of $143.2 million.$103.6 million. Upon purchase, our investment in the lease receivable of $126.8$80.4 million was credited against the total purchase price and we were no longer required to maintain a standby letter of credit as stipulated in the East and West Towers lease agreement.price. We capitalized the East and West TowersAlmaden Tower as property and equipment on our Consolidated Balance Sheets at $144.1$104.2 million, the lesser of cost or fair value, which represented the total purchase price plus other direct costs associated with the purchase.See Note 6 for discussion
As of December 1, 2017, we own the buildings and the underlying land that make up our East and West Towers purchase.
The lease agreement forcorporate headquarters in San Jose, California, including the Almaden Tower is effective through March 2017. We are the investors in the lease receivable related to the Almaden Tower lease in the amount of $80.4 million, which is recorded as investment in lease receivable on our Consolidated Balance Sheets. As of November 28, 2014, the carrying value of the lease receivable related to the Almaden Tower approximated fair value. Under the agreement for the Almaden Tower, we have the option to purchase the building at any time during the lease term for $103.6 million. If we purchase the building, the investment in the lease receivable may be credited against the purchase price. The residual value guarantee under the Almaden Tower obligation is $89.4 million.
The Almaden Tower lease is subject to standard covenants including certain financial ratios that are reported to the lessor quarterly. As of November 28, 2014, we were in compliance with all of the covenants. In the case of a default, the lessor may demand we purchase the building for an amount equal to the lease balance, or require that we remarket or relinquish the building. If we choose to remarket or are required to do so upon relinquishing the building, we are bound to arrange the sale of the building to an unrelated party and will be required to pay the lessor any shortfall between the net remarketing proceeds and the lease balance, up to the residual value guarantee amount less our investment in lease receivable. The Almaden Tower lease qualifies for operating lease accounting treatment and, as such, the building and the related obligation are not included in our Consolidated Balance Sheets. See Note 16 for discussion of our capital lease obligation.Tower.
Unconditional Purchase Obligations
Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes our non-cancellable unconditional purchase obligationsoperating leases and capitaloperating leases for each of the next five years and thereafter as of November 28, 2014December 1, 2017 (in thousands):
| | | | | | | Operating Leases | | Capital Leases | | | | Operating Leases |
| Fiscal Year | | Purchase Obligations | | Future Minimum Lease Payments | | Future Minimum Sublease Income | | Future Minimum Lease Payments | | Purchase Obligations | | Future Minimum Lease Payments | | Future Minimum Sublease Income |
| 2015 | | $ | 227,910 |
| | $ | 44,769 |
| | $ | 2,140 |
| | $ | 3,280 |
| |
| 2016 | | 28,588 |
| | 40,676 |
| | 2,102 |
| | — |
| |
| 2017 | | 13,641 |
| | 30,943 |
| | 2,068 |
| | — |
| |
| 2018 | 2018 | | 14,285 |
| | 26,547 |
| | 1,705 |
| | — |
| 2018 | | $ | 449,823 |
| | $ | 60,464 |
| | $ | 3,001 |
|
| 2019 | 2019 | | 4,492 |
| | 23,774 |
| | 1,776 |
| | — |
| 2019 | | 245,087 |
| | 62,307 |
| | 2,903 |
|
| 2020 | | 2020 | | 410 |
| | 63,341 |
| | 2,286 |
|
| 2021 | | 2021 | | — |
| | 53,670 |
| | 2,036 |
|
| 2022 | | 2022 | | — |
| | 44,016 |
| | — |
|
| Thereafter | Thereafter | | — |
| | 48,644 |
| | 2,966 |
| | — |
| Thereafter | | — |
| | 251,544 |
| | — |
|
| Total | Total | | $ | 288,916 |
| | $ | 215,353 |
| | $ | 12,757 |
| | $ | 3,280 |
| Total | | $ | 695,320 |
| | $ | 535,342 |
| | $ | 10,226 |
|
| Less: interest | | |
| | |
| | |
| | (11 | ) | |
| Total | | |
| | |
| | |
| | $ | 3,269 |
| |
Other
The table above includes operating lease commitments relatedSubsequent to December 1, 2017, we purchased land near our restructured facilities. See Note 10 for information regarding our restructuring charges.
Guarantees
The Almaden Tower lease providesheadquarters in San Jose, California for a residual value guarantee as noted above. The fair valuetotal purchase price of a residual value guarantee in lease agreements entered into after December 31, 2002, must be recognized as a liability on our Consolidated Balance Sheets. As such, we recognized $3.0 million in liabilities, related to the extended Almaden Tower lease. This liability was recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance was amortized to our Consolidated Statements of Income over the life of the original lease. As of November 28, 2014 there was no remaining balance of the unamortized portion of the fair value of the residual value guarantee remaining on our Consolidated Balance Sheets.$68.0 million.
Royalties
We have royalty commitments associated with the shipment and licensing of certain offerings and products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue. Royalty expense, which was recorded under our cost of revenue on our Consolidated Statements of Income, was approximately $45.2$100.9 million, $40.2$79.8 million and $29.6$62.3 million in fiscal 2014, 20132017, 2016 and 2012,2015, respectively.
Indemnifications
In the ordinary course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products and from time to time, we are subject to claims by our customers under these indemnification provisions. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.
To the extent permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Legal Proceedings
In connection with disputes relating to the validity or alleged infringement of third-party intellectual property rights, including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation may be very costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully defended or resolved past litigation and disputes, we may not prevail in any ongoing or future litigation and disputes. Third-party intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from licensing certain of our products or offering certain of our services, subject us to injunctions restricting our sale of products
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
or services, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers including contractual provisions under various license arrangements and service agreements.
Between May 4, 2011 and July 14, 2011, five putative class action lawsuits were filed in Santa Clara Superior Court and Alameda Superior Court in California. On September 12, 2011, the cases were consolidated into In Re High-Tech Employee Antitrust Litigation (“HTEAL”) pending in the United States District Court for the Northern District of California, San Jose Division. In the consolidated complaint, Plaintiffs alleged that Adobe, along with Apple, Google, Intel, Intuit, Lucasfilm and Pixar, agreed not to recruit each other’s employees in violation of Federal and state antitrust laws. Plaintiffs claim the alleged agreements suppressed employee compensation and deprived employees of career opportunities. Plaintiffs seek injunctive relief, monetary damages, treble damages, costs and attorneys fees. All defendants deny the allegations and that they engaged in any wrongdoing of any kind. On October 24, 2013, the court certified a class of all persons who worked in the technical, creative, and/or research and development fields on a salaried basis in the United States for one or more of the following: (a) Apple from March 2005 through December 2009; (b) Adobe from May 2005 through December 2009; (c) Google from March 2005 through December 2009; (d) Intel from March 2005 through December 2009; (e) Intuit from June 2007 through December 2009; (f) Lucasfilm from January 2005 through December 2009; or (g) Pixar from January 2005 through December 2009, excluding retail employees, corporate officers, members of the boards of directors, and senior executives of all defendants. During the second quarter of fiscal 2014, the parties reached a settlement to resolve this lawsuit, subject to the Court’s approval. On August 8, 2014, the Court rejected the settlement agreement jointly submitted by the parties. During the first quarter of fiscal 2015, the parties reached another agreement to settle the litigation. On January 15, 2015, the agreement was submitted to the Court seeking preliminary approval of the settlement. The hearing for preliminary approval is set for March 2015. We accrued a loss contingency of $10.0 million associated with this matter during the first quarter of fiscal 2014.
In addition to intellectual property disputes, and the other litigation matter described above, we are subject to legal proceedings, claims and investigations in the ordinary course of business, including claims relating to commercial, employment and other matters. Some of these disputes and legal proceedings may include speculative claims for substantial or indeterminate amounts of damages. We consider all claims on a quarterly basis in accordance with GAAP and based on known facts assess whether potential losses are considered reasonably possible, probable and estimable. Based upon this assessment, we then evaluate disclosure requirements and whether to accrue for such claims in our financial statements. This determination is then reviewed and discussed with our Audit Committee and our independent registered public accounting firm.
We make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Unless otherwise specifically disclosed here or in our Notes to Consolidated Financial Statements,this note, we have determined that no provision for liability nor disclosure is required related to any claim against us because: (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.
All legal costs associated with litigation are expensed as incurred. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us. It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.
In connection with our anti-piracy efforts, conducted both internally and through organizations such as the Business Software Alliance, from time to time we undertake litigation against alleged copyright infringers. Such lawsuits may lead to counter-claims alleging improper use of litigation or violation of other laws. We believe we have valid defenses with respect to such counter-
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
claims;counter-claims; however, it is possible that our consolidated financial position, cash flows or results of operations could be negatively affected in any particular period by the resolution of one or more of these counter-claims.
NOTE 16.15. DEBT
Our long-term debt as of November 28, 2014December 1, 2017 and November 29, 2013December 2, 2016 consisted of the following (in thousands):
|
| | | | | | | |
| | 2014 | | 2013 |
| Notes | $ | 1,496,778 |
| | $ | 1,496,028 |
|
| Fair value of interest rate swap | 14,268 |
| | — |
|
| Adjusted carrying value of Notes | 1,511,046 |
| | 1,496,028 |
|
| Capital lease obligations | 3,269 |
| | 17,945 |
|
| Total debt and capital lease obligations | 1,514,315 |
| | 1,513,973 |
|
| Less: current portion | 603,229 |
| | 14,676 |
|
| Debt and capital lease obligations | $ | 911,086 |
| | $ | 1,499,297 |
|
|
| | | | | | | |
| | 2017 | | 2016 |
| Notes | $ | 1,882,479 |
| | $ | 1,879,083 |
|
| Fair value of interest rate swap | (1,058 | ) | | 13,117 |
|
| Adjusted carrying value of Notes | 1,881,421 |
| | 1,892,200 |
|
Senior Notes
In February 2010, we issued $600$900 million of 3.25%4.75% senior notes due February 1, 2015 (the “2015 Notes”) and $900 million of 4.75% senior notes due February 1, 2020 (the “2020 Notes” and, together with the 2015 Notes, the “Notes”). Our proceeds were $1.5 billion$900 million and were net of an issuance discount of $6.6 million. The Notes rank equally with our other unsecured and unsubordinated indebtedness.$5.5 million. In addition, we incurred issuance costs of $10.7 million.$6.4 million. Both the discount and issuance costs are being amortized to interest expense over the respective termsterm of the 2020 Notes using the effective interest method.
The 2020 Notes rank equally with our other unsecured and unsubordinated indebtedness. The effective interest rate including the discount and issuance costs is 3.45% for the 2015 Notes and was 4.92% for the 2020 Notes. . Interest is payable semi-annually, in arrears, on February 1 and August 1, commencingand commenced on August 1, 20102010.
. During fiscal 2014, we made both semi-annual interest payments on our Notes totaling $62.2 million. In June 2014, we entered into interest rate swaps with a total notional amount of $900 million designated as a fair value hedge related to our 2020 Notes. The effect of such interest rate swaps is to effectively convert the fixed interest rate on our 2020 Notes to a floating interest rate based on the LIBOR plus a fixed number of basis points.LIBOR. Under the terms of the swap, we will pay monthly interest at the one-month LIBOR floating interest rate plus a spread of a fixed number of basis points on the $900 million notional amount. In exchange, we will receive 4.75% fixed rate interest from the swap counterparties. See Note 5 for further details regarding our interest rate swap derivatives.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 2015, we issued $1 billion of 3.25% senior notes due February 1, 2025 (the “2025 Notes”). Our proceeds were approximately $989.3 million which is net of an issuance discount of $10.7 million. In addition, we incurred issuance costs of $7.9 million. Both the discount and issuance costs are being amortized to interest expense over the term of the 2025 Notes using the effective interest method. The gains2025 Notes rank equally with our other unsecured and losses relatedunsubordinated indebtedness. The effective interest rate including the discount, issuance costs and interest rate agreement is 3.67%. Interest is payable semi-annually, in arrears on February 1 and August 1, and commenced on August 1, 2015. A portion of the proceeds from this offering was used to changesrepay $600 million in aggregate principal amount of previously outstanding senior notes plus accrued and unpaid interest due February 1, 2015. The remaining proceeds were used for general corporate purposes.
As of December 1, 2017, our outstanding notes payable consist of the 2020 Notes and 2025 Notes (the “Notes”) with a total carrying value of $1.88 billion, which includes the fair value of the interest rate swaps are included in interest and other income (expense),is net in our Consolidated Statement of Income and substantially offset the changes in the fair value of the hedged portion of the underlying debt that are attributable to the changes in market risk. The fair value of the interest rate swaps is reflected in other assets in our Consolidated Balance Sheets. The carrying value of the 2020 Notes was adjusted by an amount that is equal and offsetting to the fair value of the swaps. The interest receivable from the swaps based on the fixed interest rate and the interest payable based on the effective interest rates are recorded at gross in the prepaid expenses and other current assets account and accrued expenses account, respectively, in our Consolidated Balance Sheets.
issuance costs. Based on quoted prices in inactive markets, the fair value of the Notes was $1.6$1.98 billion as of November 28, 2014. The total fair value of $1.6 billionDecember 1, 2017, which excludes the effect of the fair value hedge of the 2020 Notes for which we entered into interest rate swaps for the total notional amount $900 million.described above.
We may redeem the Notes at any time, subject to a make wholemake-whole premium. In addition, upon the occurrence of certain change of control triggering events, we may be required to repurchase the Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The Notes also include covenants that limit our ability to grant liens on assets and to enter into sale and leaseback transactions, subject to significant allowances. As of November 28, 2014,December 1, 2017, we were in compliance with all of the covenants.
During the first quarter of fiscal 2014,In February and August 2017, we reclassified $599.8 million as current debtmade semi-annual interest payments on our Consolidated Balance Sheets, which represented the 20152020 and 2025 Notes net of unamortized original issuance discount. We intend to refinance the current portion of our debt on or before the due date using either newly issued debt or drawings from our existing revolving credit agreement.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit Agreement
On March 2, 2012, we entered into a five-year $1.0$1 billion senior unsecured revolving credit agreement (the “Credit Agreement”), providing for loans to us and certain of our subsidiaries. Pursuant to the terms of the Credit Agreement, we may, subject to the agreement of the applicable lenders, request up to an additional $500.0$500 million in commitments, for a maximum aggregate commitment of $1.5 billion.$1.5 billion. Loans under the Credit Agreement will bear interest at either (i) LIBOR plus a margin, based on our public debt ratings, ranging from 0.795% and 1.30%1.3% or (ii) the base rate, which is defined as the highest of (a) the agent’s prime rate, (b) the federal funds effective rate plus 0.50% or (c) LIBOR plus 1.00% plus a margin, based on our debt ratings, ranging from 0.00% to 0.30%. Commitment fees are payable quarterly at rates between 0.08% and 0.20% per year, also based on our public debt ratings. Subject to certain conditions stated in the Credit Agreement, we and any of our subsidiaries designated as additional borrowers may borrow, prepay and re-borrow amounts under the revolving credit facility at any time during the term of the Credit Agreement.
The Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including a financial covenant, events of default and indemnification provisions in favor of the lenders. The negative covenants include restrictions regarding the incurrence of liens and indebtedness, certain merger and acquisition transactions, dispositions and other matters, all subject to certain exceptions. The financial covenant, based on a quarterly financial test, requires us not to exceed a maximum leverage ratio.
On March 1, 2013, we exercised an option under the Credit Agreement to extend the maturity date of the Credit Agreement by one year to March 2, 2018. On July 27, 2015, we entered into an amendment to further extend the maturity date to July 27, 2020 and reallocated the facility among the syndicate of lenders that are parties to the Credit Agreement.
The facility will terminate and all amounts owing thereunder will be due and payable on the maturity date unless (a) the commitments are terminated earlier upon the occurrence of certain events, including an event of default, or (b) the maturity date is further extended upon our request, subject to the agreement of the lenders.
As of November 28, 2014,December 1, 2017, there were no outstanding borrowings under this Credit Agreement and we were in compliance with all covenants.
Capital Lease Obligation
In fiscal 2013, we entered into a sale-leaseback agreement totaling $25.7 million over a period of 24 months. This transaction was classified as a capital lease obligation and was recorded at fair value. As of November 28, 2014, our capital lease obligations of $3.3 million are presented as current debt in our Consolidated Balance Sheets.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 17.16. NON-OPERATING INCOME (EXPENSE)
Non-operating income (expense) for fiscal 20142017, 20132016 and 20122015 included the following (in thousands):
| | | | | 2014 | | 2013 | | 2012 | | 2017 | | 2016 | | 2015 |
| Interest and other income (expense), net: | | | | | | | | | | | | |
| Interest income | | $ | 21,355 |
| | $ | 21,887 |
| | $ | 24,549 |
| | $ | 66,069 |
| | $ | 47,340 |
| | $ | 28,759 |
|
| Foreign exchange gains (losses) | | (18,840 | ) | | (21,001 | ) | | (31,431 | ) | | (30,705 | ) | | (35,716 | ) | | (20,130 | ) |
| Realized gains on fixed income investment | | 4,024 |
| | 4,090 |
| | 3,152 |
| | 1,673 |
| | 2,880 |
| | 3,309 |
|
| Realized losses on fixed income investment | | (97 | ) | | (1,077 | ) | | (278 | ) | | (725 | ) | | (985 | ) | | (354 | ) |
| Other | | 825 |
| | 1,042 |
| | 594 |
| | 83 |
| | 29 |
| | 22,325 |
|
| Interest and other income (expense), net | | $ | 7,267 |
| | $ | 4,941 |
| | $ | (3,414 | ) | | $ | 36,395 |
| | $ | 13,548 |
| | $ | 33,909 |
|
| Interest expense | | $ | (59,732 | ) | | $ | (67,508 | ) | | $ | (67,487 | ) | | $ | (74,402 | ) | | $ | (70,442 | ) | | $ | (64,184 | ) |
| Investment gains (losses), net: | | |
| | | | | | |
| | | | |
| Realized investment gains | | $ | 1,298 |
| | $ | 1,783 |
| | $ | 8,918 |
| | $ | 3,279 |
| | $ | 4,964 |
| | $ | 2,760 |
|
| Unrealized investment gains | | 912 |
| | 1,251 |
| | 940 |
| | 4,274 |
| | 186 |
| | — |
|
| Realized investment losses | | (1,054 | ) | | (7,049 | ) | | (104 | ) | | — |
| | (6,720 | ) | | (206 | ) |
| Unrealized investment losses | | — |
| | — |
| | (250 | ) | | — |
| | — |
| | (1,593 | ) |
| Investment gains (losses), net | | $ | 1,156 |
| | $ | (4,015 | ) | | $ | 9,504 |
| | $ | 7,553 |
| | $ | (1,570 | ) | | $ | 961 |
|
| Non-operating income (expense), net | | $ | (51,309 | ) | | $ | (66,582 | ) | | $ | (61,397 | ) | | $ | (30,454 | ) | | $ | (58,464 | ) | | $ | (29,314 | ) |
NOTE 18.17. INDUSTRY SEGMENT, GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
We report segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reportable segments.
Our CEO, the chief operating decision maker, reviews revenue and gross margin information for each of our reportable segments, but does not review operating expenses on a segment by segment basis. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments.
WeFor fiscal 2017, we have the following reportable segments:
Digital Media—Our Digital Media segment provides tools and solutions that enable individuals, small and medium businesses and enterprises to create, publish, promote and monetize their digital content anywhere. Our customers include traditional content creators, web application developers and digital media professionals, as well as their management in marketing departments and agencies, companies and publishers. Our customers also include knowledge workers who create, collaborate and distribute documents.
Digital Marketing—Our Digital Marketing segment provides solutions and services for how digital advertising and marketing are created, managed, executed, measured and optimized. Our customers include digital marketers, advertisers, publishers, merchandisers, web analysts, chief marketing officers, chief information officerofficers and chief revenue officers.
Print and Publishing—Our Print and Publishing 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.
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Our segment results for fiscal 20142017, 20132016 and 20122015 were as follows (dollars in thousands):
| | | | Digital Media | | Digital Marketing | | Print and Publishing | | Total | Digital Media | | Digital Marketing | | Print and Publishing | | Total |
| Fiscal 2014 | |
| | | | |
| | |
| |
| Fiscal 2017 | | |
| | | | |
| | |
|
| Revenue | $ | 2,603,179 |
| | $ | 1,355,216 |
| | $ | 188,670 |
| | $ | 4,147,065 |
| $ | 5,010,579 |
| | $ | 2,120,032 |
| | $ | 170,894 |
| | $ | 7,301,505 |
|
| Cost of revenue | 148,958 |
| | 463,772 |
| | 9,350 |
| | 622,080 |
| 239,994 |
| | 763,468 |
| | 7,029 |
| | 1,010,491 |
|
| Gross profit | $ | 2,454,221 |
| | $ | 891,444 |
| | $ | 179,320 |
| | $ | 3,524,985 |
| $ | 4,770,585 |
| | $ | 1,356,564 |
| | $ | 163,865 |
| | $ | 6,291,014 |
|
| Gross profit as a percentage of revenue | 94 | % | | 66 | % | | 95 | % | | 85 | % | 95 | % | | 64 | % | | 96 | % | | 86 | % |
| Fiscal 2013 | |
| | | | |
| | |
| |
| Fiscal 2016 | | |
| | | | |
| | |
|
| Revenue | $ | 2,625,913 |
| | $ | 1,228,868 |
| | $ | 200,459 |
| | $ | 4,055,240 |
| $ | 3,941,011 |
| | $ | 1,736,585 |
| | $ | 176,834 |
| | $ | 5,854,430 |
|
| Cost of revenue | 170,788 |
| | 404,804 |
| | 10,965 |
| | 586,557 |
| 231,074 |
| | 581,093 |
| | 7,741 |
| | 819,908 |
|
| Gross profit | $ | 2,455,125 |
| | $ | 824,064 |
| | $ | 189,494 |
| | $ | 3,468,683 |
| $ | 3,709,937 |
| | $ | 1,155,492 |
| | $ | 169,093 |
| | $ | 5,034,522 |
|
| Gross profit as a percentage of revenue | 93 | % | | 67 | % | | 95 | % | | 86 | % | 94 | % | | 67 | % | | 96 | % | | 86 | % |
| Fiscal 2012 | |
| | | | |
| | |
| |
| Fiscal 2015 | | |
| | | | |
| | |
|
| Revenue | $ | 3,101,864 |
| | $ | 1,085,042 |
| | $ | 216,771 |
| | $ | 4,403,677 |
| $ | 3,095,160 |
| | $ | 1,508,858 |
| | $ | 191,493 |
| | $ | 4,795,511 |
|
| Cost of revenue | 130,178 |
| | 342,764 |
| | 10,840 |
| | 483,782 |
| 210,587 |
| | 525,309 |
| | 8,421 |
| | 744,317 |
|
| Gross profit | $ | 2,971,686 |
| | $ | 742,278 |
| | $ | 205,931 |
| | $ | 3,919,895 |
| $ | 2,884,573 |
| | $ | 983,549 |
| | $ | 183,072 |
| | $ | 4,051,194 |
|
| Gross profit as a percentage of revenue | 96 | % | | 68 | % | | 95 | % | | 89 | % | 93 | % | | 65 | % | | 96 | % | | 84 | % |
Effective in the first quarter of fiscal 2018, we plan to move our legacy enterprise offerings—Adobe Connect web conferencing platform and Adobe LiveCycle, an enterprise document and forms platform, from our Digital Marketing segment into Print and Publishing, in order to more closely align our Digital Marketing business with the strategic growth opportunity. We will adjust our reportable segments at the beginning of fiscal 2018 to reflect these changes as we enter into the new fiscal year.
The tables below list our revenue and property and equipment, net, by geographic area for fiscal 20142017, 20132016 and 20122015 (in thousands). With the exception of property and equipment, we do not identify or allocate our assets (including long-lived assets) by geographic area.
| | | Revenue | | 2014 | | 2013 | | 2012 | Revenue | | 2017 | | 2016 | | 2015 |
| Americas: | Americas: | | | | | | | Americas: | | | | | | |
| United States | United States | | $ | 2,115,148 |
| | $ | 1,935,429 |
| | $ | 1,969,924 |
| United States | | $ | 3,830,845 |
| | $ | 3,087,764 |
| | $ | 2,548,024 |
|
| Other | Other | | 199,221 |
| | 198,953 |
| | 226,430 |
| Other | | 385,686 |
| | 312,371 |
| | 240,020 |
|
| Total Americas | Total Americas | | 2,314,369 |
| | 2,134,382 |
| | 2,196,354 |
| Total Americas | | 4,216,531 |
| | 3,400,135 |
| | 2,788,044 |
|
| EMEA | EMEA | | 1,179,864 |
| | 1,129,180 |
| | 1,294,566 |
| EMEA | | 1,985,105 |
| | 1,619,153 |
| | 1,336,448 |
|
| APAC: | APAC: | | | | | | | APAC: | | | | | | |
| Japan | Japan | | 365,570 |
| | 472,110 |
| | 531,028 |
| Japan | | 524,254 |
| | 401,205 |
| | 347,740 |
|
| Other | Other | | 287,262 |
| | 319,568 |
| | 381,729 |
| Other | | 575,615 |
| | 433,937 |
| | 323,279 |
|
| Total APAC | Total APAC | | 652,832 |
| | 791,678 |
| | 912,757 |
| Total APAC | | 1,099,869 |
| | 835,142 |
| | 671,019 |
|
| Revenue | Revenue | | $ | 4,147,065 |
| | $ | 4,055,240 |
| | $ | 4,403,677 |
| Revenue | | $ | 7,301,505 |
| | $ | 5,854,430 |
| | $ | 4,795,511 |
|
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | Property and Equipment | | 2014 | | 2013 | Property and Equipment | | 2017 | | 2016 | | 2015 |
| Americas: | Americas: | | | | | Americas: | | | | | | |
| United States | United States | | $ | 651,281 |
| | $ | 534,115 |
| United States | | $ | 753,393 |
| | $ | 642,823 |
| | $ | 621,122 |
|
| Other | Other | | 656 |
| | 947 |
| Other | | 2,797 |
| | 559 |
| | 427 |
|
| Total Americas | Total Americas | | 651,937 |
| | 535,062 |
| Total Americas | | 756,190 |
| | 643,382 |
| | 621,549 |
|
| EMEA | EMEA | | 46,380 |
| | 52,018 |
| EMEA | | 54,181 |
| | 48,662 |
| | 43,943 |
|
| APAC: | APAC: | | | | | APAC: | | | | | | |
| India | India | | 76,428 |
| | 58,013 |
| India | | 109,051 |
| | 106,322 |
| | 111,662 |
|
| Other | Other | | 10,378 |
| | 14,681 |
| Other | | 17,554 |
| | 17,898 |
| | 10,267 |
|
| Total APAC | Total APAC | | 86,806 |
| | 72,694 |
| Total APAC | | 126,605 |
| | 124,220 |
| | 121,929 |
|
| Property and equipment, net | Property and equipment, net | | $ | 785,123 |
| | $ | 659,774 |
| Property and equipment, net | | $ | 936,976 |
| | $ | 816,264 |
| | $ | 787,421 |
|
Significant Customers
For fiscal 20142017, 2016 and 2013,2015 there were no customers that represented at least 10% of net revenue. ForAs of fiscal 2012, Ingram Micro accounted for 11% of net revenue.
In fiscal 2014year end 2017 and 2013,2016, no single customer was responsible for over 10% of our trade receivables.
NOTE 19.18. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
| | | | | 2014 | | 2017 |
| (in thousands, except per share data) | | Quarter Ended | | Quarter Ended |
| | | February 28 | | May 30 | | August 29 | | November 28 | | March 3 | | June 2 | | September 1 | | December 1 |
| Revenue | | $ | 1,000,120 |
| | $ | 1,068,208 |
| | $ | 1,005,409 |
| | $ | 1,073,328 |
| | $ | 1,681,646 |
| | $ | 1,772,190 |
| | $ | 1,841,074 |
| | $ | 2,006,595 |
|
| Gross profit | | $ | 851,611 |
| | $ | 913,304 |
| | $ | 847,685 |
| | $ | 912,385 |
| | $ | 1,444,309 |
| | $ | 1,532,830 |
| | $ | 1,578,152 |
| | $ | 1,735,723 |
|
| Income before income taxes | | $ | 64,892 |
| | $ | 121,271 |
| | $ | 62,938 |
| | $ | 112,275 |
| | $ | 460,632 |
| | $ | 492,618 |
| | $ | 541,379 |
| | $ | 643,012 |
|
| Net income | | $ | 47,046 |
| | $ | 88,527 |
| | $ | 44,686 |
| | $ | 88,136 |
| | $ | 398,446 |
| | $ | 374,390 |
| | $ | 419,569 |
| | $ | 501,549 |
|
| Basic net income per share | | $ | 0.09 |
| | $ | 0.18 |
| | $ | 0.09 |
| | $ | 0.18 |
| | $ | 0.81 |
| | $ | 0.76 |
| | $ | 0.85 |
| | $ | 1.02 |
|
| Diluted net income per share | | $ | 0.09 |
| | $ | 0.17 |
| | $ | 0.09 |
| | $ | 0.17 |
| | $ | 0.80 |
| | $ | 0.75 |
| | $ | 0.84 |
| | $ | 1.00 |
|
| | | | | 2013 | | 2016 |
| (in thousands, except per share data) | | Quarter Ended | | Quarter Ended |
| | | March 1 | | May 31 | | August 30 | | November 29 | | March 4 | | June 3 | | September 2 | | December 2 |
| Revenue | | $ | 1,007,873 |
| | $ | 1,010,549 |
| | $ | 995,119 |
| | $ | 1,041,699 |
| | $ | 1,383,335 |
| | $ | 1,398,709 |
| | $ | 1,463,967 |
| | $ | 1,608,419 |
|
| Gross profit | | $ | 851,189 |
| | $ | 875,268 |
| | $ | 848,043 |
| | $ | 894,183 |
| | $ | 1,184,763 |
| | $ | 1,196,630 |
| | $ | 1,261,266 |
| | $ | 1,391,863 |
|
| Income before income taxes | | $ | 83,484 |
| | $ | 91,127 |
| | $ | 93,260 |
| | $ | 88,270 |
| | $ | 292,307 |
| | $ | 329,830 |
| | $ | 356,301 |
| | $ | 456,700 |
|
| Net income | | $ | 65,117 |
| | $ | 76,546 |
| | $ | 83,002 |
| | $ | 65,320 |
| | $ | 254,307 |
| | $ | 244,074 |
| | $ | 270,788 |
| | $ | 399,613 |
|
| Basic net income per share | | $ | 0.13 |
| | $ | 0.15 |
| | $ | 0.16 |
| | $ | 0.13 |
| | $ | 0.51 |
| | $ | 0.49 |
| | $ | 0.54 |
| | $ | 0.81 |
|
| Diluted net income per share | | $ | 0.13 |
| | $ | 0.15 |
| | $ | 0.16 |
| | $ | 0.13 |
| | $ | 0.50 |
| | $ | 0.48 |
| | $ | 0.54 |
| | $ | 0.80 |
|
Our fiscal year is a 52- or 53-week year that ends on the Friday closest to November 30. Each of the fiscal quarters presented were comprised of 13 weeks with the exception of the first quarter of fiscal 2016 which was comprised of 14 weeks.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Adobe Systems Incorporated:
We have audited the accompanying consolidated balance sheets of Adobe Systems Incorporated and subsidiaries as of November 28, 2014December 1, 2017 and November 29, 2013,December 2, 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended November 28, 2014.December 1, 2017. We also have audited Adobe Systems Incorporated’s internal control over financial reporting as of November 28, 2014,December 1, 2017, based on criteria established in Internal Control - Integrated Framework (1992) (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)(COSO). Adobe Systems Incorporated’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Adobe Systems Incorporated and subsidiaries as of November 28, 2014December 1, 2017 and November 29, 2013,December 2, 2016, and the results of itstheir operations and itstheir cash flows for each of the years in the three-year period ended November 28, 2014,December 1, 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Adobe Systems Incorporated maintained, in all material respects, effective internal control over financial reporting as of November 28, 2014,December 1, 2017, based on criteria established in Internal Control - Integrated Framework (1992)(2013) issued by the COSO.
Adobe Systems Incorporated acquired TubeMogul, Inc. (TubeMogul) on December 19, 2016, as discussed in Note 2 to the consolidated financial statements. As discussed in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A, management excluded from its assessment of the effectiveness of Adobe System Incorporated’s internal control over financial reporting as of December 1, 2017, TubeMogul’s internal control over financial reporting associated with consolidated total assets of approximately 1.8% and consolidated total revenues of approximately 2.5%, included in the consolidated financial statements of Adobe Systems Incorporated and subsidiaries as of and for the year ended December 1, 2017. Our audit of internal control over financial reporting of Adobe Systems Incorporated as of December 1, 2017, also excluded an evaluation of the internal control over financial reporting of TubeMogul.
(signed) KPMG LLP
Santa Clara, California
January 20, 201522, 2018
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of November 28, 2014December 1, 2017. Based on their evaluation as of November 28, 2014December 1, 2017, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this Annual Report on Form 10-K was (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errorerrors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Adobe have been detected.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of November 28, 2014December 1, 2017. In making this assessment, our management used the criteria set forthestablished in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (1992).COSO. Our management has concluded that, as of November 28, 2014,December 1, 2017, our internal control over financial reporting is effective based on these criteria.
We acquired TubeMogul, Inc. (“TubeMogul”) on December 19, 2016, as discussed in Note 2 to the Consolidated Financial Statements. As permitted by the SEC staff’s Frequently Asked Question 3 on Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports (revised September 24, 2007), our management excluded from our assessment of internal control over financial reporting effectiveness as of December 1, 2017, TubeMogul’s internal control over financial reporting associated with consolidated total assets of approximately 1.8% and consolidated total revenues of approximately 2.5%, included in our Consolidated Financial Statements as of and for the year ended December 1, 2017. We will include TubeMogul in our assessment of the effectiveness of internal control over financial reporting starting fiscal 2018.
KPMG LLP, the independent registered public accounting firm that audited our financial statements included in this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting, which is included herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended November 28, 2014December 1, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
(b)
On January 14, 2015,22, 2018, Mark Garrett notified Adobe Systems Incorporated (“Adobe”) of his intent to retire as Executive Vice President and Chief Financial Officer of Adobe during 2018. Mike Dillon also notified Adobe of his intent to retire as Executive Vice President and General Counsel of Adobe during 2018. To ensure an orderly transition and continuity of operations, both Garrett and Dillon will remain in their current roles with Adobe until their respective successors are in place.
Adobe is conducting an internal and external search to fill both roles and both Garrett and Dillon will be active participants in the search for and transition to their successors.
Item 8.01. Other Events.
On January 22, 2018, we issued a press release announcing that its Boardupdated financial targets for fiscal 2018. A copy of Directors has approved a new stock repurchase program granting the Company authority to repurchase up to $2.0 billion in common stock through the end of fiscal 2017.this press release is furnished and attached hereto as Exhibit 99.1.
Under our new stock repurchase program, which is designed to return value to our stockholders and minimize dilution from stock issuances, we repurchase shares in the open market and also enter into structured repurchase agreements with third parties. The new stock repurchase program approved by our Board of Directors is substantially similar to our previous program authorizing the repurchase of up to $2.0 billion in common stock through fiscal 2015, which authority has been exhausted.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 of Form 10-K that is found in our 20152018 Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for the Company’s 20152018 Annual Meeting of Stockholders (“20152018 Proxy Statement”) is incorporated herein by reference to our 20152018 Proxy Statement. The 20152018 Proxy Statement will be filed with the SEC within 120 days after the end of the fiscal year to which this report relates. For information with respect to our executive officers, see “Executive Officers” at the end of Part I, Item 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 of Form 10-K is incorporated herein by reference to our 20152018 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 of Form 10-K is incorporated herein by reference to our 20152018 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item13 of Form 10-K is incorporated herein by reference to our 20152018 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 of Form 10-K is incorporated herein by reference to our 20152018 Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
| | | | | | | | | | | | | | |
| | | | | Incorporated by Reference** | | | | |
Exhibit Number | | Exhibit Description | | Form | | Filing Date | | Exhibit Number | | SEC File No. | | Filed Herewith |
| | | | | | | | | | | | | |
| 3.1 |
| | | | 8-K | | 4/26/11 | | 3.3 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 3.2 |
| | | | 8-K | | 9/2/16 | | 3.2 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 4.1 |
| | | | 10-Q | | 6/25/14 | | 4.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 4.2 |
| | | | S-3 | | 2/26/16 | | 4.1 |
| | 333-209764 | | |
| | | | | | | | | | | | | |
| 4.3 |
| | | | 8-K | | 1/26/10 | | 4.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | | | | Incorporated by Reference** | | | | |
Exhibit Number | | Exhibit Description | | Form | | Filing Date | | Exhibit Number | | SEC File No. | | Filed Herewith |
| | | | | | | | | | | | | |
| 4.4 |
| | | | 8-K | | 1/26/15 | | 4.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.1A |
| | | | 10-Q | | 4/9/10 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.1B |
| | | | 10-K | | 1/23/09 | | 10.3 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.1C |
| | | | 10-K | | 1/26/12 | | 10.13 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.2 |
| | | | 10-Q | | 6/29/16 | | 10.3 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3A |
| | | | 8-K | | 4/13/17 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3B |
| | | | 8-K | | 12/20/10 | | 99.4 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3C |
| | | | 8-K | | 1/27/17 | | 10.6 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3D |
| | | | 10-Q | | 10/7/04 | | 10.11 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3E |
| | | | 8-K | | 1/28/13 | | 10.2 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3F |
| | | | 8-K | | 1/28/13 | | 10.3 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3G |
| | | | 8-K | | 1/29/14 | | 10.2 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3H |
| | | | 8-K | | 1/29/14 | | 10.3 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3I |
| | | | 8-K | | 1/28/15 | | 10.2 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3J |
| | | | 8-K | | 1/28/15 | | 10.3 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3K |
| | | | 8-K | | 1/29/16 | | 10.2 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | | | | Incorporated by Reference** | | | | |
Exhibit Number | | Exhibit Description | | Form | | Filing Date | | Exhibit Number | | SEC File No. | | Filed Herewith |
| | | | | | | | | | | | | |
| 10.3L |
| | | | 8-K | | 1/29/16 | | 10.3 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3M |
| | | | 8-K | | 12/20/10 | | 99.6 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3N |
| | | | 8-K | | 12/20/10 | | 99.7 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3O |
| | | | 8-K | | 12/20/10 | | 99.8 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3P |
| | | | 8-K | | 1/27/17 | | 10.2 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.3Q |
| | | | 8-K | | 1/27/17 | | 10.3 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.4A |
| | | | 10-Q | | 6/28/13 | | 10.17 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.4B |
| | | | 8-K | | 12/20/10 | | 99.10 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.4C |
| | | | 8-K | | 1/28/13 | | 10.7 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.5 |
| | | | 8-K | | 12/11/14 | | 10.2 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.6 |
| | | | 10-Q | | 6/26/09 | | 10.12 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.7 |
| | | | 10-K | | 1/20/15 | | 10.19 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.8A |
| | Credit Agreement, dated as of March 2, 2012, among Adobe Systems Incorporated and certain subsidiaries as Borrowers, The Royal Bank of Scotland PLC and U.S. Bank National Association as Co-Documentation Agents, JPMorgan Chase Bank, N.A., as Syndication Agent, Bank of America, N.A. as Administrative Agent and Swing Line Lender, and the Other Lenders Party Thereto | | 8-K | | 3/7/12 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.8B |
| | | | 8-K | | 7/30/15 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | | | | Incorporated by Reference** | | | | |
Exhibit Number | | Exhibit Description | | Form | | Filing Date | | Exhibit Number | | SEC File No. | | Filed Herewith |
| | | | | | | | | | | | | |
| 10.9 |
| | | | 10-Q | | 8/6/09 | | 10.3 |
| | 000-52076 | | |
| | | | | | | | | | | | | |
| 10.10 |
| | | | 10-K | | 2/27/09 | | 10.9 |
| | 000-52076 | | |
| | | | | | | | | | | | | |
| 10.11 |
| | | | 10-K | | 2/27/09 | | 10.10 |
| | 000-52076 | | |
| | | | | | | | | | | | | |
| 10.12 |
| | | | S-8 | | 1/27/11 | | 99.1 |
| | 333-171902 | | |
| | | | | | | | | | | | | |
| 10.13 |
| | | | 8-K | | 1/29/14 | | 10.5 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.14 |
| | | | 8-K | | 1/28/15 | | 10.5 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.15 |
| | | | 8-K | | 1/29/16 | | 10.5 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.16 |
| | | | 8-K | | 1/29/16 | | 10.4 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.17 |
| | | | 8-K | | 1/27/17 | | 10.5 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.18 |
| | | | S-8 | | 7/29/11 | | 99.1 |
| | 333-175910 | | |
| | | | | | | | | | | | | |
| 10.19 |
| | | | S-8
| | 10/7/11
| | 99.1 |
| | 333-177229 | | |
| | | | | | | | | | | | | |
| 10.20 |
| | | | S-8
| | 11/18/11
| | 99.1 |
| | 333-178065 | | |
| | | | | | | | | | | | | |
| 10.21 |
| | | | S-8
| | 11/18/11
| | 99.2 |
| | 333-178065 | | |
| | | | | | | | | | | | | |
| 10.22 |
| | | | S-8
| | 1/27/12 | | 99.1 |
| | 333-179221 | | |
| | | | | | | | | | | | | |
| 10.23A |
| | | | S-8 | | 1/23/13 | | 99.1 |
| | 333-186143 | | |
| | | | | | | | | | | | | |
| 10.23B |
| | | | S-8 | | 1/23/13 | | 99.2 |
| | 333-186143 | | |
| | | | | | | | | | | | | |
| 10.24 |
| | | | S-8 | | 8/27/13 | | 99.1 |
| | 333-190846 | | |
| | | | | | | | | | | | | |
| 10.25 |
| | | | S-8 | | 8/27/13 | | 99.2 |
| | 333-190846 | | |
| | | | | | | | | | | | | |
| 10.26 |
| | | | 10-K | | 1/20/15 | | 10.52 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.27 |
| | | | 10-K | | 1/19/16 | | 10.32 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.28 |
| | | | 10-K | | 1/20/17 | | 10.32 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.29 |
| | | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 10.30A |
| | | | S-8 | | 9/26/14 | | 99.1 |
| | 333-198973 | | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | | | | Incorporated by Reference** | | | | |
Exhibit Number | | Exhibit Description | | Form | | Filing Date | | Exhibit Number | | SEC File No. | | Filed Herewith |
| | | | | | | | | | | | | |
| 10.30B |
| | | | S-8 | | 9/26/14 | | 99.2 |
| | 333-198973 | | |
| | | | | | | | | | | | | |
| 10.30C |
| | | | S-8 | | 9/26/14 | | 99.3 |
| | 333-198973 | | |
| | | | | | | | | | | | | |
| 10.31 |
| | | | 8-K | | 12/11/14 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.32 |
| | | | S-8 | | 3/13/15 | | 99.1 |
| | 333-202732
| | |
| | | | | | | | | | | | | |
| 10.33 |
| | | | S-1 | | 3/26/14 | | 10.2 |
| | 333-194817 | | |
| | | | | | | | | | | | | |
| 10.34 |
| | | | S-1A | | 7/7/14 | | 10.3 |
| | 333-194817 | | |
| | | | | | | | | | | | | |
| 12.1 |
| | | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 21 |
| | | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 23.1 |
| | | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 24.1 |
| | | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 31.1 |
| | | | | | | | |
| | | | X |
| | | | | | | | | | | | | |
| 31.2 |
| | | | | | | | |
| | | | X |
| | | | | | | | | | | | | |
| 32.1 |
| | | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 32.2 |
| | | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 99.1 |
| | | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.INS | | XBRL Instance | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation | | | | | | | | | | X |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
2. | Exhibits. The exhibits listed in the accompanying Index | | | Incorporated by Reference** | | | | |
Exhibit Number | | Exhibit Description | | Form | | Filing Date | | Exhibit Number | | SEC File No. | | Filed Herewith |
| | | | | | | | | | | | |
| 101.LAB | | XBRL Taxonomy Extension Labels | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation | | | | | | | | | | X |
| | | | | | | | | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition | | | | | | | | | | X |
___________________________
|
| | |
| * | | Compensatory plan or arrangement. |
| | |
| ** | | References to Exhibits 10.9 through 10.11 are to filings made by Omniture, Inc. |
| | |
| † | | The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K, are not deemed filed orwith the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Adobe Systems Incorporated under the Securities Act of 1933, as partamended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-K.10-K, irrespective of any general incorporation language contained in such filing. |
| | |
| †† | | References to Exhibits 10.33 through 10.34 are to filings made by TubeMogul, Inc.
|
ITEM 16. FORM 10-K SUMMARY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | |
| | ADOBE SYSTEMS INCORPORATED |
| | |
| | By: | /s/ MARK GARRETT |
| | | Mark Garrett |
| | | Executive Vice President and |
| | | Chief Financial Officer |
| | | (Principal Financial Officer) |
Date: January 20, 201522, 2018
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Shantanu Narayen and Mark Garrett, and each or any one of them, his or her lawful attorneys-in-fact and agents, for such person in any and all capacities, to sign any and all amendments to this report and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact and agent, or substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ JOHN E. WARNOCK | | | | January 20, 2015 |
John E. Warnock | | Chairman of the Board of Directors | | |
| | | | |
/s/ CHARLES M. GESCHKE | | | | January 20, 2015 |
Charles M. Geschke | | Chairman of the Board of Directors | | |
| | | | | |
| /s/ SHANTANU NARAYEN | | | | January 20, 201522, 2018 |
Shantanu Narayen | | Director,Chairman of the Board of Directors, President and Chief Executive Officer
(Principal Executive Officer) | | |
| | | | | |
| /s/ MARK GARRETT | | | | January 20, 201522, 2018 |
| Mark Garrett | | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | |
| | | | | |
/s/ RICHARD T. ROWLEYJOHN MURPHY | | | | January 20, 201522, 2018 |
Richard T. RowleyJohn Murphy | | Senior Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer) | | |
| | | | |
| /s/ JAMES DALEY | | | | January 22, 2018 |
| James Daley | | Director | | |
| | | | | |
| /s/ AMY BANSE | | | | January 20, 201522, 2018 |
| Amy Banse | | Director | | |
| | | | | |
/s/ KELLY BARLOWEDWARD BARNHOLT | | | | January 20, 201522, 2018 |
Kelly BarlowEdward Barnholt | | Director | | |
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ EDWARD W. BARNHOLT | | | | January 20, 2015 |
Edward W. Barnholt | | Director | | |
| | | | |
/s/ ROBERT K. BURGESS | | | | January 20, 201522, 2018 |
Robert K. Burgess | | Director | | |
| | | | | |
| /s/ FRANK CALDERONI | | | | January 20, 201522, 2018 |
| Frank Calderoni | | Director | | |
| | | | |
/s/ MICHAEL R. CANNON | | | | January 20, 2015 |
Michael R. Cannon | | Director | | |
| | | | |
/s/ JAMES E. DALEY | | | | January 20, 2015 |
James E. Daley | | Director | | |
| | | | | |
| /s/ LAURA DESMOND | | | | January 20, 201522, 2018 |
| Laura Desmond | | Director | | |
| | | | | |
| /s/ CHARLES GESCHKE | | | | January 22, 2018 |
| Charles Geschke | | Director | | |
| | | | |
/s/ DANIEL L. ROSENSWEIG | | | | January 20, 201522, 2018 |
Daniel L. Rosensweig | | Director | | |
| | | | | |
/s/ ROBERT SEDGEWICKJOHN WARNOCK | | | | January 20, 201522, 2018 |
Robert SedgewickJohn Warnock | | Director | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
SUMMARY OF TRADEMARKS
The following trademarks of Adobe Systems Incorporated or its subsidiaries, which may be registered in the United States and/or other countries, are referenced in this Form 10-K:
Acrobat
Acrobat Reader
Adobe
Adobe Connect
Adobe MuseCreativeSync
Adobe Dimension
Adobe Premiere
Adobe Sensei
After Effects
Behance
Creative Cloud
Creative Suite
Dreamweaver
EchoSign
FlashFotolia
Illustrator
InCopy
InDesign
Lightroom
LiveCycle
PhoneGap
PhoneGap Build
Photoshop
PostScript
Reader
Tubemogul
Typekit
All other trademarks are the property of their respective owners.
INDEX TOEXHIBITS
|
| | | | | | | | | | | | | | |
| | | | | Incorporated by Reference** | | | | |
Exhibit Number | | Exhibit Description | | Form | | Filing Date | | Exhibit Number | | SEC File No. | | Filed Herewith |
| | | | | | | | | | | | | |
| 3.1 |
| | Restated Certificate of Incorporation of Adobe Systems Incorporated | | 8-K | | 4/26/11 | | 3.3 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 3.2 |
| | Amended and Restated Bylaws | | 8-K | | 10/30/12 | | 3.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 4.1 |
| | Specimen Common Stock Certificate | | 10-Q | | 6/25/14 | | 4.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 4.2 |
| | Form of Indenture | | S-3 | | 1/15/10 | | 4.1 |
| | 333-164378 | | |
| | | | | | | | | | | | | |
| 4.3 |
| | Forms of Global Note for Adobe Systems Incorporated’s 3.250% Notes due 2015 and 4.750% Notes due 2020, together with Form of Officer’s Certificate setting forth the terms of the Notes | | 8-K | | 1/26/10 | | 4.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.1A |
| | Amended 1994 Performance and Restricted Stock Plan* | | 10-Q | | 4/9/10 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.1B |
| | Form of Restricted Stock Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan* | | 10-K | | 1/23/09 | | 10.3 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.1C |
| | Form of Restricted Stock Unit Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan* | | 10-K | | 1/26/12 | | 10.13 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.2A |
| | 1996 Outside Directors Stock Option Plan, as amended* | | 10-Q | | 4/12/06 | | 10.6 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.2B |
| | Forms of Stock Option Agreements used in connection with the 1996 Outside Directors Stock Option Plan* | | S-8 | | 6/16/00 | | 4.8 |
| | 333-39524 | | |
| | | | | | | | | | | | | |
| 10.3 |
| | 1997 Employee Stock Purchase Plan, as amended* | | 8-K | | 4/26/11 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.4A |
| | 2003 Equity Incentive Plan, as amended* | | 8-K | | 4/14/14 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.4B |
| | Form of Stock Option Agreement used in connection with the 2003 Equity Incentive Plan* | | 8-K | | 12/20/10 | | 99.4 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.4C |
| | Form of RSU Grant Notice and Award Agreement pursuant to the 2003 Equity Incentive Plan* | | 8-K | | 1/28/13 | | 10.6 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.4D |
| | Form of Restricted Stock Agreement used in connection with the 2003 Equity Incentive Plan* | | 10-Q | | 10/7/04 | | 10.11 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | | | Incorporated by Reference** | | | | |
Exhibit
Number
| | Exhibit Description | | Form | | Filing Date | | Exhibit Number | | SEC File No. | | Filed
Herewith
|
| | | | | | | | | | | | |
10.4E |
| | Form of Performance Share Program pursuant to the 2003 Equity Incentive Plan (applicable to the 2011 Performance Share Program)* | | 8-K | | 1/29/10 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | |
10.4F |
| | Award Calculation Methodology to the 2011 Performance Share Program pursuant to the 2003 Equity Incentive Plan* | | 8-K | | 1/28/11 | | 10.3 |
| | 000-15175 | | |
| | | | | | | | | | | | |
10.4G |
| | Form of Award Grant Notice and Performance Share Award Agreement pursuant to the 2003 Equity Incentive Plan (applicable to the 2011 Performance Share Program)* | | 8-K | | 12/20/10 | | 99.5 |
| | 000-15175 | | |
| | | | | | | | | | | | |
10.4H |
| | Form of Performance Share Program pursuant to the 2003 Equity Incentive Plan (applicable to the 2012 Performance Share Program)* | | 8-K | | 1/26/12 | | 10.2 |
| | 000-15175 | | |
| | | | | | | | | | | | |
10.4I |
| | Award Calculation Methodology to the 2012 Performance Share Program pursuant to the 2003 Equity Incentive Plan* | | 8-K | | 1/26/12 | | 10.3 |
| | 000-15175 | | |
| | | | | | | | | | | | |
10.4J |
| | Form of Performance Share Award Grant Notice and Performance Share Award Agreement pursuant to the 2003 Equity Incentive Plan (applicable to the 2012 Performance Share Program)* | | 10-K | | 1/26/12 | | 10.61 |
| | 000-15175 | | |
| | | | | | | | | | | | |
10.4K |
| | 2013 Performance Share Program pursuant to the 2003 Equity Incentive Plan* | | 8-K | | 1/28/13 | | 10.2 |
| | 000-15175 | | |
| | | | | | | | | | | | |
10.4L |
| | Form of Performance Share Award Grant Notice and Performance Share Award Agreement pursuant to the 2003 Equity Incentive Plan (applicable to the 2013 Performance Share Program)* | | 8-K | | 1/28/13 | | 10.3 |
| | 000-15175 | | |
| | | | | | | | | | | | |
10.4M |
| | 2014 Performance Share Program pursuant to the 2003 Equity Incentive Plan* | | 8-K | | 1/29/14 | | 10.2 |
| | 000-15175 | | |
| | | | | | | | | | | | |
10.4N |
| | Form of Performance Share Award Grant Notice and Performance Share Award Agreement pursuant to the 2003 Equity Incentive Plan (applicable to the 2014 Performance Share Program)* | | 8-K | | 1/29/14 | | 10.3 |
| | 000-15175 | | |
| | | �� | | | | | | | | | |
10.4O |
| | Form of Director Initial Grant Restricted Stock Unit Award Agreement used in connection with the 2003 Equity Incentive Plan* | | 8-K | | 12/20/10 | | 99.6 |
| | 000-15175 | | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | | | | Incorporated by Reference** | | | | |
Exhibit Number | | Exhibit Description | | Form | | Filing Date | | Exhibit Number | | SEC File No. | | Filed Herewith |
| | | | | | | | | | | | | |
| 10.4P |
| | Form of Director Annual Grant Restricted Stock Unit Award Agreement used in connection with the 2003 Equity Incentive Plan* | | 8-K | | 12/20/10 | | 99.7 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.4Q |
| | Form of Director Annual Grant Stock Option Agreement used in connection with the 2003 Equity Incentive Plan* | | 8-K | | 12/20/10 | | 99.8 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.5A |
| | 2005 Equity Incentive Assumption Plan, as amended and restated* | | 10-Q | | 6/28/13 | | 10.17 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.5B |
| | Form of Stock Option Agreement used in connection with the 2005 Equity Incentive Assumption Plan* | | 8-K | | 12/20/10 | | 99.10 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.5C |
| | Form of RSU Grant Notice and Award Agreement pursuant to the 2005 Equity Incentive Assumption Plan* | | 8-K | | 1/28/13 | | 10.7 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.6 |
| | Allaire Corp. 1997 Stock Incentive Plan* | | S-8 | | 3/27/01 | | 4.06 |
| | 333-57708 | | |
| | | | | | | | | | | | | |
| 10.7 |
| | Allaire Corporation 1998 Stock Incentive Plan, as amended* | | S-8 | | 3/27/01 | | 4.07 |
| | 333-57708 | | |
| | | | | | | | | | | | | |
| 10.8 |
| | Allaire Corporation 2000 Stock Incentive Plan* | | S-8 | | 3/27/01 | | 4.08 |
| | 333-57708 | | |
| | | | | | | | | | | | | |
| 10.9 |
| | Andromedia, Inc. 1999 Stock Plan* | | S-8 | | 12/7/99 | | 4.09 |
| | 333-92233 | | |
| | | | | | | | | | | | | |
| 10.10 |
| | Macromedia, Inc. 1999 Stock Option Plan* | | S-8 | | 8/17/00 | | 4.07 |
| | 333-44016 | | |
| | | | | | | | | | | | | |
| 10.11 |
| | Macromedia, Inc. 2002 Equity Incentive Plan, as amended* | | S-8 | | 8/10/05 | | 4.08 |
| | 333-127392 | | |
| | | | | | | | | | | | | |
| 10.12 |
| | Form of Macromedia, Inc. Stock Option Agreement* | | S-8 | | 8/10/05 | | 4.09 |
| | 333-127392 | | |
| | | | | | | | | | | | | |
| 10.13 |
| | Form of Macromedia, Inc. Revised Non-Plan Stock Option Agreement* | | S-8 | | 11/23/04 | | 4.10 |
| | 333-120712 | | |
| | | | | | | | | | | | | |
| 10.14 |
| | Form of Macromedia, Inc. Restricted Stock Purchase Agreement* | | 10-Q | | 2/8/05 | | 10.01 |
| | 000-22688 | | |
| | | | | | | | | | | | | |
| 10.15A |
| | Forms of Retention Agreement* | | 10-K | | 2/17/98 | | 10.44 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.15B |
| | Second Amendment to Retention Agreement between Adobe Systems Incorporated and Shantanu Narayen, effective as of December 17, 2010* | | 10-K | | 1/27/11 | | 10.40 |
| | 000-15175 | | |
|
| | | | | | | | | | | | | | |
| | | | | Incorporated by Reference** | | | | |
Exhibit Number | | Exhibit Description | | Form | | Filing Date | | Exhibit Number | | SEC File No. | | Filed Herewith |
| | | | | | | | | | | | | |
| 10.15C |
| | Retention Agreement between Adobe Systems Incorporated and Shantanu Narayen, effective December 5, 2014 | | 8-K | | 12/11/14 | | 10.20 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.16 |
| | Form of Indemnity Agreement* | | 10-Q | | 6/26/09 | | 10.12 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.17 |
| | Second Amended and Restated Master Lease of Land and Improvements by and between SMBC Leasing and Finance, Inc. and Adobe Systems Incorporated | | 10-Q | | 10/7/04 | | 10.14 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.18A |
| | Lease between Adobe Systems Incorporated and Selco Service Corporation, dated March 26, 2007 | | 8-K | | 3/28/07 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.18B |
| | Participation Agreement among Adobe Systems Incorporated, Selco Service Corporation, et al. dated March 26, 2007 | | 8-K | | 3/28/07 | | 10.2 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.18C |
| | Master Amendment No. 2 among Adobe Systems Incorporated, Selco Service Corporation and KeyBank National Association dated October 31, 2011 | | 10-K | | 1/22/13 | | 10.13 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.19 |
| | Adobe Systems Incorporated Deferred Compensation Plan, as Amended and Restated* | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 10.20 |
| | Employment offer letter between Adobe Systems Incorporated and Richard Rowley, dated October 30, 2006* | | 8-K | | 11/16/06 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.21 |
| | Employment offer letter between Adobe Systems Incorporated and Mark Garrett dated January 5, 2007* | | 8-K | | 1/26/07 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.22 |
| | Credit Agreement, dated as of March 2, 2012, among Adobe Systems Incorporated and certain subsidiaries as Borrowers, The Royal Bank of Scotland PLC and U.S. Bank National Association as Co-Documentation Agents, JPMorgan Chase Bank, N.A., as Syndication Agent, Bank of America, N.A. as Administrative Agent and Swing Line Lender, and the Other Lenders Party Thereto | | 8-K | | 3/7/12 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.23 |
| | Purchase and Sale Agreement, by and between NP Normandy Overlook, LLC, as Seller and Adobe Systems Incorporated as Buyer, effective as of May 12, 2008 | | 8-K | | 5/15/08 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.24A |
| | Omniture, Inc. 1999 Equity Incentive Plan, as amended (the “Omniture 1999 Plan”)* | | S-1 | | 4/4/06 | | 10.2A |
| | 333-132987 | | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | | | | Incorporated by Reference** | | | | |
Exhibit Number | | Exhibit Description | | Form | | Filing Date | | Exhibit Number | | SEC File No. | | Filed Herewith |
| | | | | | | | | | | | | |
| 10.24B |
| | Forms of Stock Option Agreement under the Omniture 1999 Plan* | | S-1 | | 4/4/06 | | 10.2B |
| | 333-132987 | | |
| | | | | | | | | | | | | |
| 10.24C |
| | Form of Stock Option Agreement under the Omniture 1999 Plan used for Named Executive Officers and Non-Employee Directors* | | S-1 | | 6/9/06 | | 10.2C |
| | 333-132987 | | |
| | | | | | | | | | | | | |
| 10.25 |
| | Omniture, Inc. 2006 Equity Incentive Plan and related forms* | | 10-Q | | 8/6/09 | | 10.3 |
| | 000-52076 | | |
| | | | | | | | | | | | | |
| 10.26 |
| | Omniture, Inc. 2007 Equity Incentive Plan and related forms* | | 10-K | | 2/27/09 | | 10.9 |
| | 000-52076 | | |
| | | | | | | | | | | | | |
| 10.27 |
| | Omniture, Inc. 2008 Equity Incentive Plan and related forms* | | 10-K | | 2/27/09 | | 10.10 |
| | 000-52076 | | |
| | | | | | | | | | | | | |
| 10.28A |
| | Visual Sciences, Inc. (formerly, WebSideStory, Inc.) 2004 Equity Incentive Award Plan (the “VS 2004 Plan”) and Form of Option Grant Agreement* | | 10-K | | 2/29/08 | | 10.6 |
| | 000-52076 | | |
| | | | | | | | | | | | | |
| 10.28B |
| | Form of Restricted Stock Award Grant Notice and Restricted Stock Award Agreement under the VS 2004 Plan* | | 10-K | | 2/29/08 | | 10.6A |
| | 000-52076 | | |
| | | | | | | | | | | | | |
| 10.29 |
| | Visual Sciences, Inc. (formerly, WebSideStory, Inc.) 2006 Employment Commencement Equity Incentive Award Plan and Form of Option Grant Agreement* | | 10-K | | 2/29/08 | | 10.8 |
| | 000-52076 | | |
| | | | | | | | | | | | | |
| 10.30 |
| | Day Software Holding AG International Stock Option/Stock Issuance Plan* | | S-8 | | 11/1/10 | | 99.1 |
| | 333-170254 | | |
| | | | | | | | | | | | | |
| 10.31 |
| | Day Interactive Holding AG U.S. Stock Option/ Stock Issuance Plan* | | S-8 | | 11/1/10 | | 99.2 |
| | 333-170254 | | |
| | | | | | | | | | | | | |
| 10.32 |
| | Demdex, Inc. 2008 Stock Plan, as amended* | | S-8 | | 1/27/11 | | 99.1 |
| | 333-171902 | | |
| | | | | | | | | | | | | |
| 10.33 |
| | 2011 Executive Cash Performance Bonus Plan* | | 8-K | | 1/28/11 | | 10.4 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.34 |
| | 2011 Executive Annual Incentive Plan* | | 8-K | | 1/28/11 | | 10.5 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.35 |
| | EchoSign, Inc. 2005 Stock Plan, as amended* | | S-8 | | 7/29/11 | | 99.1 |
| | 333-175910 | | |
| | | | | | | | | | | | | |
| 10.36 |
| | TypeKit, Inc. 2009 Equity Incentive Plan, as amended* | | S-8
| | 10/7/11
| | 99.1 |
| | 333-177229 | | |
| | | | | | | | | | | | | |
| 10.37 |
| | Auditude, Inc. 2009 Equity Incentive Plan, as amended* | | S-8
| | 11/18/11
| | 99.1 |
| | 333-178065 | | |
|
| | | | | | | | | | | | | | |
| | | | | Incorporated by Reference** | | | | |
Exhibit Number | | Exhibit Description | | Form | | Filing Date | | Exhibit Number | | SEC File No. | | Filed Herewith |
| | | | | | | | | | | | | |
| 10.38 |
| | Auditude, Inc. Employee Stock Option Plan, as amended* | | S-8
| | 11/18/11
| | 99.2 |
| | 333-178065 | | |
| | | | | | | | | | | | | |
| 10.39 |
| | Description of 2012 Director Compensation* | | 10-K | | 1/26/12 | | 10.76 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.40 |
| | Adobe Systems Incorporated 2011 Executive Severance Plan in the Event of a Change of Control for Prior Participants * | | 8-K | | 12/15/11 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.41 |
| | Adobe Systems Incorporated 2011 Executive Severance Plan in the Event of a Change of Control* | | 8-K | | 12/15/11 | | 10.2 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.42 |
| | 2012 Executive Annual Incentive Plan* | | 8-K | | 1/26/12 | | 10.4 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.43 |
| | Efficient Frontier, Inc. 2003 Stock Option/Stock Issuance Plan, as Amended and Restated* | | S-8
| | 1/27/12 | | 99.1 |
| | 333-179221 | | |
| | | | | | | | | | | | | |
| 10.44 |
| | Efficient Frontier, Inc. Form of Non-Plan Stock Option Agreement* | | S-8 | | 1/27/12 | | 99.2 |
| | 333-179221 | | |
| | | | | | | | | | | | | |
| 10.45 |
| | Nomination and Standstill Agreement between the Company and the ValueAct Group dated December 4, 2012 | | 8-K
| | 12/5/12
| | 99.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.46A |
| | Behance, Inc. 2012 Equity Incentive Plan* | | S-8 | | 1/23/13 | | 99.1 |
| | 333-186143 | | |
| | | | | | | | | | | | | |
| 10.46B |
| | Amendment No. 1 to the Behance, Inc. 2012 Equity Incentive Plan* | | S-8 | | 1/23/13 | | 99.2 |
| | 333-186143 | | |
| | | | | | | | | | | | | |
| 10.47 |
| | 2013 Executive Annual Incentive Plan* | | 8-K | | 1/28/13 | | 10.5 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.48 |
| | Neolane 2008 Stock Option Plan* | | S-8 | | 8/27/13 | | 99.1 |
| | 333-190846 | | |
| | | | | | | | | | | | | |
| 10.49 |
| | 2012 Neolane Stock Option Plan for The United States* | | S-8 | | 8/27/13 | | 99.2 |
| | 333-190846 | | |
| | | | | | | | | | | | | |
| 10.50 |
| | Description of 2013 Director Compensation* | | 10-K | | 1/21/14 | | 10.80 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.51 |
| | Description of 2014 Director Compensation* | | 10-K | | 1/21/14 | | 10.81 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.52 |
| | Description of 2015 Director Compensation* | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 10.53 |
| | 2014 Executive Annual Incentive Plan* | | 8-K | | 1/29/14 | | 10.5 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 10.54A |
| | Aviary, Inc. 2008 Stock Plan, as amended | | S-8 | | 9/26/14 | | 99.1 |
| | 333-198973 | | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
| | | | | Incorporated by Reference** | | | | |
Exhibit Number | | Exhibit Description | | Form | | Filing Date | | Exhibit Number | | SEC File No. | | Filed Herewith |
| | | | | | | | | | | | | |
| 10.54B |
| | Form of Stock Option Grant Notice and Award Agreement pursuant to the Aviary, Inc. 2008 Stock Plan (Installment Vesting) | | S-8 | | 9/26/14 | | 99.2 |
| | 333-198973 | | |
| | | | | | | | | | | | | |
| 10.54C |
| | Form of Stock Option Grant Notice and Award Agreement pursuant to the Aviary, Inc. 2008 Stock Plan (Installment Vesting, Non-U.S.) | | S-8 | | 9/26/14 | | 99.3 |
| | 333-198973 | | |
| 10.55 |
| | Adobe Systems Incorporated 2014 Executive Severance Plan in the Event of a Change of Control | | 8-K | | 12/11/14 | | 10.1 |
| | 000-15175 | | |
| | | | | | | | | | | | | |
| 12.1 |
| | Ratio of Earnings to Fixed Charges | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 21 |
| | Subsidiaries of the Registrant | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 23.1 |
| | Consent of Independent Registered Public Accounting Firm, KPMG LLP | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 24.1 |
| | Power of Attorney (set forth on the signature page to this Annual Report on Form 10-K) | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 31.1 |
| | Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | |
| | | | X |
| | | | | | | | | | | | | |
| 31.2 |
| | Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934 | | | | | | |
| | | | X |
| | | | | | | | | | | | | |
| 32.1 |
| | Certification of Chief Executive Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934† | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 32.2 |
| | Certification of Chief Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934† | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.INS | | XBRL Instance | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.LAB | | XBRL Taxonomy Extension Labels | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition | | | | | | | | | | X |
___________________________
|
| | |
* | | Compensatory plan or arrangement. |
| | |
** | | References to Exhibits 10.6 through 10.14 are to filings made by Macromedia, Inc. References to Exhibits 10.24A through 10.29 are to filings made by Omniture, Inc. |
| | |
† | | The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Adobe Systems Incorporated under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-K, irrespective of any general incorporation language contained in such filing.
|