The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto. Discussion regarding our financial condition and results of operations for fiscal 2021 as compared to fiscal 2020 is included in Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 3, 2021 , filed with theSEC onJanuary 21, 2022 . CRITICAL ACCOUNTING POLICIES AND ESTIMATES In preparing our Consolidated Financial Statements in accordance with GAAP and pursuant to the rules and regulations of theSEC , we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We evaluate our assumptions, judgments and estimates on a regular basis. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, business combinations and income taxes have the greatest potential impact on our Consolidated Financial Statements. These areas are key components of our results of operations and are based on complex rules requiring us to make judgments and estimates, and consequently, we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.
Revenue Recognition
Our contracts with customers may include multiple goods and services. For example, some of our offerings include both on-premise and/or on-device software licenses and cloud services. Determining whether the software licenses and the cloud services are distinct from each other, and therefore performance obligations to be accounted for separately, or not distinct from each other, and therefore part of a single performance obligation, may require significant judgment. We have concluded that the on-premise/on-device software licenses and cloud services provided in our Creative Cloud and Document Cloud subscription offerings are not distinct from each other such that revenue from each offering should be recognized ratably over the subscription period for which the cloud services are provided. In reaching this conclusion, we considered the nature of our promise to Creative Cloud and Document Cloud customers, which is to provide a complete end-to-end creative design or document workflow solution that operates seamlessly across multiple devices and teams. We fulfill this promise by providing access to a solution that integrates cloud-based and on-premise/on-device features that, together through their integration, provide functionalities, utility and workflow efficiencies that could not be obtained from either the on-premise/on-device software or cloud services on their own. Cloud-based features that are integral to our Creative Cloud and Document Cloud offerings and that work together with the on-premise/on-device software include, but are not limited to:Creative Cloud Libraries , which enable customers to access their work, settings, preferences and other assets seamlessly across desktop and mobile devices and collaborate across teams in real time; shared reviews which enable simultaneous editing and commenting of digital assets across desktop, mobile and web; automatic cloud rendering of a design which enables it to be worked on in multiple mediums; and Sensei, Adobe's cloud-hosted artificial intelligence and machine learning framework, which enables features such as automated photo-editing, photograph content-awareness, natural language processing, optical character recognition and automated document tagging.
Business Combinations
We allocate the purchase price of acquired companies to tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets and deferred revenue obligations. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
•future expected cash flows from software license sales, subscriptions, support
agreements, consulting contracts and acquired developed technologies and
patents;
•expected costs to develop acquired technologies and patents internally into
commercially viable products;
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•historical and expected customer attrition rates and anticipated growth in
revenue from acquired customers;
•the acquired company's trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company's product portfolio;
•the expected use of the acquired assets; and
•discount rates.
In connection with the purchase price allocations for our acquisitions, we
estimate the fair value of the deferred revenue obligations assumed. The
estimated fair value of these obligations is determined utilizing a cost
build-up approach. The cost build-up approach determines fair value by
estimating the costs related to fulfilling the obligations plus a normal profit
margin.
Unanticipated events and circumstances may occur which may affect the accuracy
or validity of such assumptions, estimates or actual results.
Accounting for Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards. Significant judgment is required in determining our current provision for income taxes and deferred tax assets or liabilities. We record a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not. Our assumptions, judgments and estimates relative to the current provision for income taxes take into account our interpretation and application of current tax laws and possible outcomes of current and future examinations conducted by domestic and foreign tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and associated reserves. To the extent that the final determination of any of these examinations is different from the amounts recorded, such differences will affect the provision for income taxes and the effective tax rate in the period in which such determination is made.
Recent Accounting Pronouncements
See Note 1 of our Notes to Consolidated Financial Statements for information
regarding recent accounting pronouncements that are of significance, or
potential significance to us.
ACQUISITIONS In the fourth quarter of fiscal 2021, we completed the acquisition of Frame.io, a privately held company that provides a cloud-based video collaboration platform, for approximately$1.24 billion and we began integrating Frame.io into our Digital Media reportable segment. In the first quarter of fiscal 2021, we completed the acquisition of Workfront, a privately held company that provides a workflow platform, for approximately$1.52 billion in cash consideration and we began integrating Workfront into our Digital Experience reportable segment.
See Note 3 of our Notes to Consolidated Financial Statements for further
information regarding these acquisitions.
RESULTS OF OPERATIONS
Overview of 2022
For our fiscal 2022, we experienced strong demand across our Digital Media and Digital Experience offerings, driven by the ongoing shift towards a digital-first world. As we execute on our long-term growth initiatives, we have continued to experience growth in software-based subscription revenue across our portfolio of offerings. Digital Media In our Digital Media segment, we are a market leader with Creative Cloud, our subscription-based offering which provides desktop tools, mobile apps and cloud-based services for designing, creating and publishing rich content and immersive 3D experiences. Starting inDecember 2021 , Creative Cloud includes Adobe Express, a web and mobile application designed to enable a broad spectrum of users, including novice content creators, communicators and creative professionals, to create, edit and customize content quickly and easily with content-first, task-based solutions. Creative Cloud delivers value with deep, cross-product integration, frequent product updates and feature enhancements, cloud-enabled services including storage and 37 -------------------------------------------------------------------------------- Table of Contents syncing of files across users' devices, machine learning and artificial intelligence, access to marketplace, social and community-based features with our Adobe Stock and Behance services, app creation capabilities, tools which assist with enterprise deployments and team collaboration, and affordable pricing for cost-sensitive customers. We offer Creative Cloud for individuals, students, teams and enterprises. We expect Creative Cloud will drive sustained long-term revenue growth through a continued expansion of our customer base by attracting new users with new features and products like Adobe Express that make creative tools accessible to first-time creators and communicators, and delivering new features and technologies to existing customers with our latest releases such as share for review. We have also built out a marketplace for Creative Cloud subscribers to enable the delivery and purchase of stock content in our Adobe Stock service. Overall, our strategy with Creative Cloud is designed to enable us to increase our revenue with users, attract more new customers, and grow our recurring and predictable revenue stream that is recognized ratably. We continue to implement strategies that are designed to accelerate awareness, consideration and purchase of subscriptions to our Creative Cloud offerings. These strategies include increasing the value Creative Cloud users receive, such as offering new desktop, web and mobile applications, as well as targeted promotions and offers that attract past customers and potential users to experience and ultimately subscribe to Creative Cloud. Because of the shift towards Creative Cloud subscriptions and Enterprise Term License Agreements ("ETLAs"), revenue from perpetual licensing of our Creative products has been immaterial to our business. We are also a market leader with our Document Cloud offerings built around our Adobe Acrobat family of products, with a set of integrated mobile apps and cloud-based document services which enable users to create, review, approve, sign and track documents regardless of platform or application source type. Document Cloud, which enhances the way people manage critical documents at home, in the office and across devices, includes Adobe Acrobat, Adobe Acrobat Sign and Adobe Scan. Adobe Acrobat is offered both through subscription and perpetual licenses. As part of our Creative Cloud and Document Cloud strategies, we utilize a data-driven operating model ("DDOM") and our Adobe Experience Cloud solutions to raise awareness of our products, drive new customer acquisition, engagement and retention, and optimize customer journeys, and it continues to contribute strong growth in the business. Annualized Recurring Revenue ("ARR") is currently the key performance metric our management uses to assess the health and trajectory of our overall Digital Media segment. ARR should be viewed independently of revenue, deferred revenue and remaining performance obligations as ARR is a performance metric and is not intended to be combined with any of these items. We adjust our reported ARR on an annual basis to reflect any exchange rate changes. Our reported ARR results in the current fiscal year are based on currency rates set at the beginning of the year and held constant throughout the year for measurement purposes. We calculate ARR as follows: Annual Value of Creative Cloud Subscriptions and Services Creative ARR + Annual Creative ETLA Contract Value Annual Value of Document Cloud Subscriptions and Services Document Cloud ARR + Annual Document Cloud ETLA Contract Value Creative ARR Digital Media ARR + Document Cloud ARR InMarch 2022 , in response to theRussia -Ukraine war, we announced a halt of all new sales of our products and services inRussia andBelarus . As a result, we reduced our Digital Media ARR balance by$75 million , which represented our Digital Media ARR for existing business inRussia andBelarus . While we continued to provide Digital Media services inUkraine , we also reduced our Digital Media ARR balance by an additional$12 million , which represented our Digital Media business inUkraine . This resulted in a total ARR reduction of$87 million taken at the beginning of the second quarter of fiscal 2022. Creative ARR exiting fiscal 2022 was$11.60 billion , up from$10.22 billion at the end of fiscal 2021. Document Cloud ARR exiting fiscal 2022 was$2.37 billion , up from$1.93 billion at the end of fiscal 2021. Total Digital Media ARR grew to$13.97 billion at the end of fiscal 2022, up from$12.15 billion at the end of fiscal 2021. Revaluing our ending ARR for fiscal 2022 using currency rates at the beginning of fiscal 2023, our Digital Media ARR at the end of fiscal 2022 would be$13.26 billion or approximately$712 million lower than the ARR reported above. 38 -------------------------------------------------------------------------------- Table of Contents Our success in driving growth in ARR has positively affected our revenue growth. Creative revenue in fiscal 2022 was$10.46 billion , up from$9.55 billion in fiscal 2021 and representing 10% year-over-year growth. Document Cloud revenue in fiscal 2022 was$2.38 billion , up from$1.97 billion in fiscal 2021 and representing 21% year-over-year growth. Total Digital Media segment revenue grew to$12.84 billion in fiscal 2022, up from$11.52 billion in fiscal 2021 and representing 11% year-over-year growth driven by strong net new user growth.
Digital Experience
We are a market leader in the fast-growing category addressed by our Digital Experience segment. The Adobe Experience Cloud applications, services and platform are designed to manage customer journeys, enable personalized experiences at scale and deliver intelligence for businesses of any size in any industry. Our differentiation and competitive advantage are strengthened by our ability to use the Adobe Experience Platform to integrate our comprehensive set of solutions.
Adobe Experience Cloud delivers solutions for our customers across the following
strategic growth pillars:
•Data insights and audiences. Our solutions, including Adobe Analytics, Adobe Experience Platform, Customer Journey Analytics, Adobe Audience Manager and our Real-time Customer Data Platform, deliver robust customer profiles and AI-powered analytics across the customer journey to provide timely, relevant experiences across platforms.
•Content and commerce. Our solutions help customers manage, deliver and optimize
content delivery through Adobe Experience Manager, and enable shopping
experiences that scale from mid-market to enterprise businesses with Adobe
Commerce.
•Customer journeys. Our solutions help businesses manage, test, target,
personalize and orchestrate campaigns and customer journeys across B2E use
cases, including through Marketo Engage, Adobe Campaign, Adobe Target and
Journey Optimizer.
•Marketing workflow. We offer Adobe Workfront, a work management platform
directed toward marketers to orchestrate campaign workflows.
In addition to chief marketing officers, chief revenue officers and digital marketers, users of our Digital Experience solutions include advertisers, campaign managers, publishers, data analysts, content managers, social marketers, marketing executives and information management and technology executives. These customers often are involved in workflows that utilize other Adobe products, such as our Digital Media offerings. By combining the creativity of our Digital Media business with the science of our Digital Experience business, we help our customers to more efficiently and effectively make, manage, measure and monetize their content across every channel with an end-to-end workflow and feedback loop. We utilize a direct sales force to market and license our Digital Experience solutions, as well as an extensive ecosystem of partners, including marketing agencies, systems integrators and independent software vendors that help license and deploy our solutions to their customers. We have made significant investments to broaden the scale and size of all of these routes to market, and our recent financial results reflect the success of these investments. Digital Experience revenue was$4.42 billion in fiscal 2022, up from$3.87 billion in fiscal 2021 which represents 14% year-over-year growth. Driving this increase was the increase in subscription revenue across our offerings which grew to$3.88 billion in fiscal 2022 from$3.38 billion in fiscal 2021, representing 15% year-over-year growth.
Macroeconomic Conditions
As a corporation with an extensive global footprint, we are subject to risks and exposures from foreign currency exchange rate fluctuations caused by significant events with macroeconomic impacts, including, but not limited to, theRussia -Ukraine war, COVID-19 pandemic and actions taken by central banks to counter inflation. We continuously monitor the direct and indirect impacts of these circumstances on our business and financial results, as well as the overall global economy and geopolitical landscape. Foreign currency exchange rate fluctuations have negatively impacted our revenue and earnings during fiscal 2022, and are expected to continue to negatively impact our financial results in fiscal 2023. While our revenue and earnings are relatively predictable as a result of our subscription-based business model, the broader implications of these macroeconomic events on our business, results of operations and overall financial position, particularly in the long term, remain uncertain. See the section titled "Risk Factors" in Part I, Item 1A of this report for further discussion of the possible impact of these macroeconomic issues on our business. 39 -------------------------------------------------------------------------------- Table of Contents
Financial Performance Summary for Fiscal 2022
•Total Digital Media ARR of approximately$13.97 billion as ofDecember 2, 2022 increased by$1.82 billion , or 15%, from$12.15 billion as ofDecember 3, 2021 . The change in our Digital Media ARR was primarily due to new user adoption of our Creative Cloud and Document Cloud offerings, partially offset by an$87 million ARR reduction taken inMarch 2022 in response to theRussia -Ukraine war. •Creative revenue of$10.46 billion increased by$913 million , or 10%, during fiscal 2022, from$9.55 billion in fiscal 2021. Document Cloud revenue of$2.38 billion increased by$409 million , or 21%, during fiscal 2022, from$1.97 billion in fiscal 2021. The increases were primarily due to subscription revenue growth associated with our Creative Cloud and Document Cloud offerings.
•Digital Experience revenue of
during fiscal 2022, from
primarily due to subscription revenue growth across our offerings.
•Remaining performance obligations of$15.19 billion as ofDecember 2, 2022 increased by$1.20 billion , or 9%, from$13.99 billion as ofDecember 3, 2021 , primarily due to new contracts and renewals for our Digital Media and Digital Experience offerings, partially offset by the impact of foreign currency exchange rate fluctuations. •Cost of revenue of$2.17 billion increased by$300 million , or 16%, during fiscal 2022, from$1.87 billion in fiscal 2021 primarily due to increases in hosting services and data center costs, as well as increases in base and incentive compensation and related benefits costs. •Operating expenses of$9.34 billion increased by$1.23 billion , or 15%, during fiscal 2022, from$8.12 billion in fiscal 2021 primarily due to increases in base and incentive compensation and related benefits costs, as well as increased marketing spend. •Cash flows from operations of$7.84 billion during fiscal 2022 increased by$608 million , or 8%, from$7.23 billion in fiscal 2021 primarily due to higher net income after adjustment for non-cash items.
Revenue
Revenue for fiscal 2021 benefited from an extra week in the first quarter of
fiscal 2021 due to our 52/53 week financial calendar whereby fiscal 2021 was a
53-week year compared with fiscal 2022 and 2020 which were 52-week years.
% Change
(dollars in millions) 2022 2021 2020 2022-2021
Subscription $ 16,388 $ 14,573 $ 11,626 12 %
Percentage of total revenue 93 % 92 % 90 %
Product 532 555 507 (4) %
Percentage of total revenue 3 % 4 % 4 %
Services and other 686 657 735 4 %
Percentage of total revenue 4 % 4 % 6 %
Total revenue $ 17,606 $ 15,785 $ 12,868 12 %
Subscription
Our subscription revenue is comprised primarily of fees we charge for our
subscription and hosted service offerings, and related support, including
Creative Cloud and certain of our Adobe Experience Cloud and Document Cloud
services. We primarily recognize subscription revenue ratably over the term of
agreements with our customers, beginning with commencement of service.
Subscription revenue related to certain offerings, where fees are based on a
number of transactions and invoicing is aligned to the pattern of performance,
customer benefit and consumption, are recognized on a usage basis.
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We have the following reportable segments: Digital Media, Digital Experience,
and Publishing and Advertising. Subscription revenue by reportable segment for
fiscal 2022, 2021 and 2020 is as follows:
% Change
(dollars in millions) 2022 2021 2020 2022-2021
Digital Media $ 12,385 $ 11,048 $ 8,813 12 %
Digital Experience 3,880 3,379 2,660 15 %
Publishing and Advertising 123 146 153 (16) %
Total subscription revenue $ 16,388 $ 14,573 $ 11,626 12 %
Product
Our product revenue is comprised primarily of fees related to licenses for
on-premise software purchased on a perpetual basis, for a fixed period of time
or based on usage for certain of our OEM and royalty agreements. We primarily
recognize product revenue at the point in time the software is available to the
customer, provided all other revenue recognition criteria are met.
Services and Other
Our services and other revenue is comprised primarily of fees related to consulting, training, maintenance and support for certain on-premise licenses that are recognized at a point in time and our advertising offerings. We typically sell our consulting contracts on a time-and-materials or fixed-fee basis. These revenues are recognized as the services are performed for time-and-materials contracts and on a relative performance basis for fixed-fee contracts. Training revenues are recognized as the services are performed. Our maintenance and support offerings, which entitle customers, partners and developers to receive desktop product upgrades and enhancements or technical support, depending on the offering, are generally recognized ratably over the term of the arrangement. Transaction-based advertising revenue is recognized on a usage basis as we satisfy the performance obligations to our customers.
Segments
In fiscal 2022, we categorized our products into the following reportable
segments:
•Digital Media-Our Digital Media segment provides products, services and
solutions that enable individuals, teams and enterprises to create, publish and
promote their content anywhere and accelerate their productivity by modernizing
how they view, share, engage with and collaborate on documents and creative
content. Our customers include creative professionals, including photographers,
video editors, graphic and experience designers and game developers,
communicators, including content creators, students, marketers and knowledge
workers, and consumers.
•Digital Experience-Our Digital Experience segment provides an integrated
platform and set of applications and services that enable brands and businesses
to create, manage, execute, measure, monetize and optimize customer experiences
that span from analytics to commerce. Our customers include marketers,
advertisers, agencies, publishers, merchandisers, merchants, web analysts, data
scientists, developers and executives across the C-suite.
•Publishing and Advertising-Our Publishing and Advertising segment contains
legacy products and services that address diverse market opportunities,
including eLearning solutions, technical document publishing, web conferencing,
document and forms platform, web application development, high-end printing and
our Adobe Advertising Cloud offerings.
Segment Information
% Change
(dollars in millions) 2022 2021 2020 2022-2021
Digital Media $ 12,842 $ 11,520 $ 9,233 11 %
Percentage of total revenue 73 % 73 % 72 %
Digital Experience 4,422 3,867 3,125 14 %
Percentage of total revenue 25 % 24 % 24 %
Publishing and Advertising 342 398 510 (14) %
Percentage of total revenue 2 % 3 % 4 %
Total revenue $ 17,606 $ 15,785 $ 12,868 12 %
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Digital Media
Revenue by major offerings in our Digital Media reportable segment for fiscal
2022, 2021 and 2020 were as follows:
% Change
(dollars in millions) 2022 2021 2020 2022-2021
Creative Cloud $ 10,459 $ 9,546 $ 7,736 10 %
Document Cloud 2,383 1,974 1,497 21 %
Total Digital Media revenue $ 12,842 $ 11,520 $ 9,233 11 %
Revenue from Digital Media increased $1.32 billion during fiscal 2022 as
compared to fiscal 2021, driven by increases in revenue associated with our
Creative and Document Cloud subscription offerings due to continued demand amid
an increasingly digital environment and strong customer acquisition and
engagement, partially offset by the impact of foreign currency exchange rate
fluctuations.
Digital Experience
Revenue from Digital Experience increased $555 million during fiscal 2022 as
compared to fiscal 2021 primarily due to net new additions across our
subscription offerings, partially offset by the impact of foreign currency
exchange rate fluctuations.
Geographical Information
% Change
(dollars in millions) 2022 2021 2020 2022-2021
Americas $ 10,251 $ 8,996 $ 7,454 14 %
Percentage of total revenue 58 % 57 % 58 %
EMEA 4,593 4,252 3,400 8 %
Percentage of total revenue 26 % 27 % 26 %
APAC 2,762 2,537 2,014 9 %
Percentage of total revenue 16 % 16 % 16 %
Total revenue $ 17,606 $ 15,785 $ 12,868 12 %
Overall revenue during fiscal 2022 increased in all geographic regions as
compared to fiscal 2021 primarily due to increases in Digital Media revenue and,
to a lesser extent, increases in Digital Experience revenue. Within each
geographic region, the fluctuations in revenue by reportable segment were
attributable to the factors noted in the segment information above.
Included in the overall change in revenue for fiscal 2022 as compared to fiscal 2021 were impacts associated with foreign currency which were mitigated in part by our foreign currency hedging program. During fiscal 2022, theU.S. Dollar primarily strengthened against EMEA and APAC foreign currencies as compared to fiscal 2021, which decreased revenue inU.S. Dollar equivalents by approximately$486 million . During fiscal 2022, the foreign currency impacts to revenue were offset in part by net hedging gains from our cash flow hedging program of$176 million .
See Note 2 of our Notes to Consolidated Financial Statements for additional
details of revenue by geography.
Cost of Revenue
% Change
(dollars in millions) 2022 2021 2020 2022-2021
Subscription $ 1,646 $ 1,374 $ 1,108 20 %
Percentage of total revenue 9 % 9 % 9 %
Product 35 41 36 (15) %
Percentage of total revenue * * *
Services and other 484 450 578 8 %
Percentage of total revenue 3 % 3 % 4 %
Total cost of revenue $ 2,165 $ 1,865 $ 1,722 16 %
_________________________________________
(*) Percentage is less than 1%
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Subscription
Cost of subscription revenue consists of third-party hosting services and data center costs, including expenses related to operating our network infrastructure. Cost of subscription revenue also includes compensation costs associated with network operations, implementation, account management and technical support personnel, royalty fees, software costs and amortization of certain intangible assets.
Cost of subscription revenue increased due to the following:
Components of
% Change
2022-2021
Hosting services and data center costs 9 %
Amortization of intangibles 4
Base compensation and related benefits 3
Incentive compensation, cash and stock-based 1
Royalty costs 2
Various individually insignificant items 1
Total change 20 %
Product
Cost of product revenue is primarily comprised of third-party royalties,
localization costs and the costs associated with the manufacturing of our
products.
Services and Other
Cost of services and other revenue is primarily comprised of compensation and
contracted costs incurred to provide consulting services, training and product
support, and hosting services and data center costs. Cost of services and other
also includes media costs related to impressions purchased from third-party ad
inventory sources for our transaction-based Adobe Advertising Cloud offerings.
Cost of services and other revenue increased during fiscal 2022 as compared to
fiscal 2021 primarily due to increases in compensation costs and professional
fees.
Operating Expenses
% Change
(dollars in millions) 2022 2021 2020 2022-2021
Research and development $ 2,987 $ 2,540 $ 2,188 18 %
Percentage of total revenue 17 % 16 % 17 %
Sales and marketing 4,968 4,321 3,591 15 %
Percentage of total revenue 28 % 27 % 28 %
General and administrative 1,219 1,085 968 12 %
Percentage of total revenue 7 % 7 % 8 %
Amortization of intangibles 169 172 162 (2) %
Percentage of total revenue 1 % 1 % 1 %
Total operating expenses $ 9,343 $ 8,118 $ 6,909 15 %
Research and Development
Research and development expenses consist primarily of compensation and
contracted costs associated with software development, third-party hosting
services and data center costs, related facilities costs and expenses associated
with computer equipment and software used in development activities.
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Research and development expenses increased due to the following:
Components of
% Change
2022-2021
Incentive compensation, cash and stock-based 7 %
Base compensation and related benefits 7
Professional and consulting fees 2
Various individually insignificant items 2
Total change 18 %
We believe that investments in research and development, including the
recruiting and hiring of software developers, are critical to remain competitive
in the marketplace and are directly related to continued timely development of
new and enhanced offerings and solutions. We will continue to focus on long-term
opportunities available in our end markets and make significant investments in
the development of our subscription and service offerings, applications and
tools.
Sales and Marketing
Sales and marketing expenses consist primarily of compensation costs, amortization of contract acquisition costs, including sales commissions, travel expenses and related facilities costs for our sales, marketing, order management and global supply chain management personnel. Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows and events, public relations and other market development programs.
Sales and marketing expenses increased due to the following:
Components of
% Change
2022-2021
Marketing spend related to campaigns, events and overall marketing efforts
5 % Base compensation and related benefits 4 Incentive compensation, cash and stock-based 3 Various individually insignificant items 3 Total change 15 % General and Administrative General and administrative expenses consist primarily of compensation and contracted costs, travel expenses and related facilities costs for our finance, facilities, human resources, legal, information services and executive personnel. General and administrative expenses also include outside legal and accounting fees, provision for bad debts, expenses associated with computer equipment and software used in the administration of the business, charitable contributions and various forms of insurance.
General and administrative expenses increased due to the following:
Components of
% Change
2022-2021
Professional and consulting fees 4 %
Incentive compensation, cash and stock-based 4
Base compensation and related benefits 3
Charitable contributions 2
Charges related to cancellation of corporate events, net of recoveries
(2) Various individually insignificant items 1 Total change 12 %
Professional and consulting fees increased from fiscal 2022 as compared to
fiscal 2021 primarily due to incurred transaction costs associated with our
planned acquisition of Figma.
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Non-Operating Income (Expense), Net
% Change
(dollars in millions) 2022 2021 2020 2022-2021
Interest expense $ (112) $ (113) $ (116) (1) %
Percentage of total revenue (1) % (1) % (1) %
Investment gains (losses), net (19) 16 13 **
Percentage of total revenue * * *
Other income (expense), net 41 - 42 **
Percentage of total revenue * * *
Total non-operating income (expense), net
(61) (7) %
_________________________________________
(*) Percentage is less than 1%. (**) Percentage is not meaningful.
Interest Expense
Interest expense represents interest associated with our debt instruments.
Interest on our senior notes is payable semi-annually, in arrears, on
and
Investment Gains (Losses), Net
Investment gains (losses), net consists principally of unrealized holding gains and losses associated with our deferred compensation plan assets, and gains and losses associated with our direct and indirect investments in privately held companies. Other Income (Expense), Net Other income (expense), net consists primarily of interest earned on cash, cash equivalents and short-term fixed income investments. Other income (expense), net also includes realized gains and losses on fixed income investments and foreign exchange gains and losses.
Other income (expense), increased during fiscal 2022 primarily due to increases
in interest income driven by higher average interest rates.
Provision for (Benefit from) Income Taxes
% Change
(dollars in millions) 2022 2021 2020 2022-2021
Provision for (benefit from) income taxes $ 1,252 $ 883 $ (1,084) 42 %
Percentage of total revenue 7 % 6 % (8) %
Effective tax rate 21 % 15 % (26) %
Our effective tax rate increased by approximately six percentage points during
fiscal 2022 as compared to fiscal 2021, primarily due to lower tax benefits
related to stock-based compensation in fiscal 2022.
Our effective tax rate for fiscal 2022 was the same as the
statutory tax rate primarily due to the impact of the
credit, largely offset by state taxes.
During fiscal 2020, we completed intra-entity transfers of certain IP rights to our Irish subsidiary in order to better align the ownership of these rights with how our business operates. The transfers did not result in taxable gains; however, our Irish subsidiary recognized deferred tax assets for the book and tax basis difference of the transferred IP rights. As a result of these transactions, we recorded deferred tax assets, net of valuation allowance, and related tax benefits totaling$1.35 billion , based on the fair value of the IP rights transferred. The tax-deductible amortization related to the transferred IP rights is recognized over the period of economic benefit. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized based on evaluation of all available positive and negative evidence. On the basis of this evaluation, we continue to maintain a valuation allowance to reduce our deferred tax assets to the amount realizable. The total valuation allowance was$402 million as ofDecember 2, 2022 , primarily related to certain state credits. 45 -------------------------------------------------------------------------------- Table of Contents We are aUnited States -based multinational company subject to tax in multiple domestic and foreign tax jurisdictions. The currentU.S. tax law subjects the earnings of certain foreign subsidiaries toU.S. tax and generally allows an exemption from taxation for distributions from foreign subsidiaries. In the current global tax policy environment, the domestic and foreign governing bodies continue to consider, and in some cases introduce, changes in regulations applicable to corporate multinationals such as Adobe. As regulations are issued, we account for finalized regulations in the period of enactment.
See Note 10 of our Notes to Consolidated Financial Statements for further
information regarding our provision for (benefit from) income taxes.
Accounting for Uncertainty in Income Taxes
The gross liabilities for unrecognized tax benefits excluding interest and penalties were$321 million ,$289 million and$201 million for fiscal 2022, 2021 and 2020, respectively. If the total unrecognized tax benefits as ofDecember 2, 2022 ,December 3, 2021 andNovember 27, 2020 were recognized,$203 million ,$199 million and$136 million would decrease the respective effective tax rates. As ofDecember 2, 2022 andDecember 3, 2021 , the combined amounts of accrued interest and penalties related to tax positions taken on our tax returns were approximately$17 million and$22 million , respectively. These amounts were included in long-term income taxes payable in their respective years. The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. These events could cause large fluctuations in the balance sheet classification of our tax assets and liabilities. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Although the timing of resolution, settlement and closing of audits is not certain, it is reasonably possible that the underlying unrecognized tax benefits may decrease by up to$25 million over the next 12 months. Our future effective tax rates may be materially affected by changes in the tax rates in jurisdictions where our income is earned, changes in jurisdictions in which our profits are determined to be earned and taxed, changes in the valuation of our deferred tax assets and liabilities, changes in or interpretation of tax rules and regulations in the jurisdictions in which we do business, or unexpected changes in business and market conditions that could reduce certain tax benefits. In addition,the United States and other countries and jurisdictions in which we conduct business, including those covered by governing bodies that enact tax laws applicable to us, such as theEuropean Commission of theEuropean Union , could make changes to relevant tax, accounting or other laws and interpretations thereof that have a material impact to us. These countries, governmental bodies and intergovernmental economic organizations such as theOrganization for Economic Cooperation and Development , have or could make unprecedented assertions about how taxation is determined and, in some cases, have proposed or enacted new laws that are contrary to the way in which rules and regulations have historically been interpreted and applied. In the current global tax policy environment, any changes in laws, regulations and interpretations could adversely affect our effective tax rates, cause us to respond by making changes to our business structure, or result in other costs to us which could adversely affect our operations and financial results. Moreover, we are subject to the examination of our income tax returns by domestic and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from these examinations. Our policy is to record interest and penalties related to unrecognized tax benefits in income tax expense. We believe our tax estimates to be reasonable; however, we cannot provide assurance that the final determination of any of these examinations will not have an adverse effect on our financial position and results of operations. 46 --------------------------------------------------------------------------------
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
This data should be read in conjunction with our Consolidated Statements of Cash
Flows.
As of
(in millions) December 2, 2022 December 3, 2021
Cash and cash equivalents $ 4,236 $ 3,844
Short-term investments $ 1,860 $ 1,954
Working capital $ 868 $ 1,737
Stockholders' equity $ 14,051 $ 14,797
A summary of our cash flows for fiscal 2022, 2021 and 2020 is as follows:
(in millions) 2022 2021 2020 Net cash provided by operating activities$ 7,838 $ 7,230 $ 5,727 Net cash used for investing activities (570) (3,537) (414) Net cash used for financing activities (6,825) (4,301) (3,488)
Effect of foreign currency exchange rates on cash and
cash equivalents
(51) (26) 3 Net change in cash and cash equivalents$ 392 $
(634)
Our primary source of cash is receipts from revenue. Our primary uses of cash are our stock repurchase program as described below and general business expenses including payroll, marketing and third-party hosting services. Other sources of cash include proceeds from participation in the employee stock purchase plan. Other uses of cash include business acquisitions, purchases of property and equipment and payments for taxes related to net share settlement of equity awards.
Cash Flows from Operating Activities
For fiscal 2022, net cash provided by operating activities of$7.84 billion was primarily comprised of net income adjusted for the net effect of non-cash items. The primary working capital sources of cash were increases in deferred revenue driven by Digital Media and Digital Experience offerings, partially offset by increases in trade receivables attributable to the timing of billings.
Cash Flows from Investing Activities
For fiscal 2022, net cash used for investing activities of$570 million was primarily due to ongoing capital expenditures and business acquisitions. See Note 3 of our Notes to Consolidated Financial Statements for further information regarding these acquisitions.
Cash Flows from Financing Activities
For fiscal 2022, net cash used for financing activities of$6.83 billion was primarily due to payments for our common stock repurchases and taxes paid related to the net share settlement of equity awards, offset in part by proceeds from re-issuance of treasury stock mainly for our employee stock purchase plan. See the section titled "Stock Repurchase Program" below.
Liquidity and Capital Resources Considerations
Our existing cash, cash equivalents and investment balances may fluctuate during
fiscal 2023 due to changes in our planned cash outlay.
Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, risks detailed in the section titled "Risk Factors" in Part I, Item 1A of this report. Based on our current business plan and revenue prospects, we believe that our existing cash, cash equivalents and investment balances, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital, operating resource expenditure and capital expenditure requirements for the next twelve months. Our cash equivalent and short-term investment portfolio as ofDecember 2, 2022 consisted of asset-backed securities, corporate debt securities, foreign government securities, money market funds, municipal securities, time deposits,U.S. agency 47 -------------------------------------------------------------------------------- Table of Contents
securities and
management firms to manage a large portion of our invested cash.
We expect to continue our investing activities, including short-term and long-term investments, purchases of computer systems for research and development, sales and marketing, product support and administrative staff, and facilities expansion. Furthermore, cash reserves may be used to repurchase stock under our stock repurchase program and to strategically acquire companies, products or technologies that are complementary to our business. OnSeptember 15, 2022 , we entered into a definitive agreement under which we intend to acquireFigma, Inc. ("Figma") for approximately$20 billion , comprised of approximately half cash and half stock, subject to customary purchase price adjustments. Approximately 6 million additional restricted stock units will be granted to Figma's Chief Executive Officer and employees that will vest over four years subsequent to closing. The transaction is subject to regulatory approvals and customary closing conditions, and is expected to close in 2023. We will be required to pay Figma a reverse termination fee of$1 billion if the transaction fails to receive regulatory clearance, assuming all other closing conditions have been satisfied or waived, or if it fails to close within 18 months fromSeptember 15, 2022 . We expect to finance the cash portion of the consideration using cash on hand and short-term debt instruments. While the transaction is pending, at a minimum we expect to maintain share repurchases sufficient to offset the dilution of equity issuances to our employees.
Revolving Credit Agreement
During 2022, we entered into a credit agreement (the "Revolving Credit Agreement") with a syndicate of lenders, providing for a five-year$1.5 billion senior unsecured revolving credit facility throughJune 30, 2027 , which replaces our previous five-year$1 billion senior unsecured revolving credit agreement dated as ofOctober 17, 2018 . Subject to the agreement of lenders, we may obtain up to an additional$500 million in commitments, for a maximum aggregate commitment of$2 billion . As ofDecember 2, 2022 , there were no outstanding borrowings under this credit agreement and the entire$1.5 billion credit line remains available for borrowing. Under the terms of our Revolving Credit Agreement, we are not prohibited from paying cash dividends unless payment would trigger an event of default or if one currently exists. We do not anticipate paying any cash dividends in the foreseeable future.
Senior Notes
We have$4.15 billion senior notes outstanding, which rank equally with our other unsecured and unsubordinated indebtedness. As ofDecember 2, 2022 , the carrying value of our senior notes was$4.13 billion and our maximum commitment for interest payments was$416 million for the remaining duration of our outstanding senior notes. Interest is payable semi-annually, in arrears onFebruary 1 andAugust 1 . Our senior notes do not contain any financial covenants. See Note 17 of our Notes to Consolidated Financial Statements for further details regarding our debt. During the first quarter of fiscal 2022, we reclassified the senior notes dueFebruary 1, 2023 as current debt in our Consolidated Balance Sheets. As ofDecember 2, 2022 , the carrying value of our current debt was$500 million , net of the related discount and issuance costs. We intend to repay the current portion of our debt on or before the due date.
Contractual Obligations
Our purchase obligations consist of agreements to purchase goods and services entered into in the ordinary course of business. As ofDecember 2, 2022 , the value of our non-cancellable unconditional purchase obligations was$6.09 billion , primarily relating to contracts with vendors for third-party hosting and data center services. See Note 16 of our Notes to Consolidated Financial Statements for additional information regarding our purchase obligations. We lease certain facilities and data centers under non-cancellable operating lease arrangements that expire at various dates through 2032. As ofDecember 2, 2022 , the value of our obligations under operating leases was$548 million .
See Note 18 of our Notes to Consolidated Financial Statements for additional
information regarding our lease obligations.
Other
Our transition tax liability related to historical undistributed foreign earnings, which was accrued as a result of theU.S. Tax Act, was approximately$313 million as ofDecember 2, 2022 and is payable in installments through fiscal 2026. As we repatriate foreign earnings for use inthe United States , the distributions will generally be exempt from federal income taxes. In addition, theU.S. Tax Act requires companies to capitalize and amortize research and development expenditures starting fiscal 2023. If not modified, we anticipate an adverse impact to our effective rates for income taxes paid, which will be partially offset by the increase in the foreign-derived intangible income deduction, for fiscal 2023 and beyond. 48 -------------------------------------------------------------------------------- Table of Contents The Inflation Reduction Act enacted onAugust 16, 2022 introduced new provisions including a corporate book minimum tax effective for us beginning in fiscal 2024 and an excise tax on net stock repurchases made afterDecember 31, 2022 . We continue to monitor developments and evaluate impacts, if any, of these provisions to our results of operations and cash flows.
Stock Repurchase Program
To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we may repurchase our shares in the open market or enter into structured repurchase agreements with third parties. InDecember 2020 , our Board of Directors granted authority to repurchase up to$15 billion in our common stock through the end of fiscal 2024. During fiscal 2022, we repurchased a total of 15.7 million shares, including approximately 10.4 million shares at an average price of$375.03 through structured repurchase agreements entered into during fiscal 2021 and fiscal 2022, as well as 5.3 million shares at an average purchase price of$451.55 through an accelerated share repurchase agreement entered into during the first quarter of fiscal 2022. During the fourth quarter of fiscal 2022, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of$1.75 billion . As ofDecember 2, 2022 ,$583 million of prepayment remained under our outstanding structured stock repurchase agreement. Subsequent toDecember 2, 2022 , as part of theDecember 2020 stock repurchase authority, we entered into an accelerated share repurchase agreement with a large financial institution whereupon we provided them with a prepayment of$1.4 billion and received an initial delivery of 3.2 million shares, which represents approximately 75% of our prepayment. Upon completion of the$1.4 billion accelerated share repurchase agreement,$5.15 billion remains under ourDecember 2020 authority.
See section titled ” Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of
I I , Item 5 of this report for stock repurchases during the quarter ended
Statements for further details regarding our stock repurchase program.
Indemnifications
In the ordinary course of business, we provide indemnifications of varying scope to customers and channel partners against claims of intellectual property infringement made by third parties arising from the use of our products and from time to time, we are subject to claims by our customers under these indemnification provisions. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations. To the extent permitted underDelaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. 49 -------------------------------------------------------------------------------- Table of Contents
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