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Form 10-Q ADOBE INC. For: Jun 03

June 29, 2022 4:13 PM EDT

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adbe-20220603
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 3, 2022
 or
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 INC.
(Exact name of registrant as specified in its charter)
________________________________
Delaware77-0019522
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

345 Park Avenue, San Jose, California 95110-2704
(Address of principal executive offices and zip code)

(408536-6000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.0001 par value per shareADBENASDAQ
________________________________
 
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   No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes   No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   No
As of June 24, 2022, 468.0 million shares of the registrant’s common stock, $0.0001 par value per share, were issued and outstanding.



ADOBE INC.
FORM 10-Q
 
TABLE OF CONTENTS
 
  Page No.

PART I—FINANCIAL INFORMATION
 
Item 1.

 

 



 

 

Item 2.

Item 3.

Item 4.


 PART II—OTHER INFORMATION
 
Item 1.

Item 1A.

Item 2.

Item 4.

Item 5.

Item 6.





 
2

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except par value)
 June 3,
2022
December 3,
2021
(Unaudited)(*)
ASSETS
Current assets:  
Cash and cash equivalents$3,365 $3,844 
Short-term investments1,934 1,954 
Trade receivables, net of allowances for doubtful accounts of $19 and $16, respectively
1,588 1,878 
Prepaid expenses and other current assets1,021 993 
Total current assets7,908 8,669 
Property and equipment, net1,790 1,673 
Operating lease right-of-use assets, net430 443 
Goodwill12,801 12,668 
Other intangibles, net1,650 1,820 
Deferred income taxes882 1,085 
Other assets865 883 
Total assets$26,326 $27,241 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:  
Trade payables$366 $312 
Accrued expenses1,615 1,736 
Debt499  
Deferred revenue4,753 4,733 
Income taxes payable62 54 
Operating lease liabilities90 97 
Total current liabilities7,385 6,932 
Long-term liabilities: 
Debt3,627 4,123 
Deferred revenue123 145 
Income taxes payable503 534 
Deferred income taxes4 5 
Operating lease liabilities442 453 
Other liabilities257 252 
Total liabilities12,341 12,444 
Stockholders’ equity: 
Preferred stock, $0.0001 par value; 2 shares authorized; none issued
  
Common stock, $0.0001 par value; 900 shares authorized; 601 shares issued; 
471 and 475 shares outstanding, respectively
  
Additional paid-in-capital9,102 8,428 
Retained earnings26,022 23,905 
Accumulated other comprehensive income (loss)(195)(137)
Treasury stock, at cost (130 and 126 shares, respectively)
(20,944)(17,399)
Total stockholders’ equity13,985 14,797 
Total liabilities and stockholders’ equity$26,326 $27,241 
_________________________________________
(*)    The condensed consolidated balance sheet as of December 3, 2021 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
3

ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
 Three Months EndedSix Months Ended
 June 3,
2022
June 4,
2021
June 3,
2022
June 4,
2021
Revenue: 
Subscription$4,070 $3,520 $8,028 $7,104 
Product146 153 291 308 
Services and other170 162 329 328 
Total revenue4,386 3,835 8,648 7,740 
 
Cost of revenue:
Subscription410 328 803 652 
Product9 9 19 19 
Services and other120 107 229 220 
Total cost of revenue539 444 1,051 891 
Gross profit3,847 3,391 7,597 6,849 
 
Operating expenses:
Research and development738 612 1,439 1,232 
Sales and marketing1,247 1,073 2,405 2,122 
General and administrative291 256 560 546 
Amortization of intangibles42 44 84 89 
Total operating expenses2,318 1,985 4,488 3,989 
 Operating income1,529 1,406 3,109 2,860 
 
Non-operating income (expense):
Interest expense(28)(28)(56)(58)
Investment gains (losses), net(8)8 (17)13 
Other income (expense), net(1) (1)4 
Total non-operating income (expense), net(37)(20)(74)(41)
Income before income taxes1,492 1,386 3,035 2,819 
Provision for income taxes314 270 591 442 
Net income$1,178 $1,116 $2,444 $2,377 
Basic net income per share$2.50 $2.34 $5.17 $4.97 
Shares used to compute basic net income per share472 478 472 478 
Diluted net income per share$2.49 $2.32 $5.15 $4.93 
Shares used to compute diluted net income per share473 481 474 482 



4

ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
Three Months EndedSix Months Ended
 June 3,
2022
June 4,
2021
June 3,
2022
June 4,
2021
Increase/(Decrease)Increase/(Decrease)
Net income$1,178 $1,116 $2,444 $2,377 
Other comprehensive income (loss), net of taxes:
Available-for-sale securities:
Unrealized gains / losses on available-for-sale securities(15) (29)(3)
Derivatives designated as hedging instruments:
Unrealized gains / losses on derivative instruments
63 (15)86 (10)
Reclassification adjustment for realized gains / losses on derivative instruments(28)12 (43)24 
Net increase (decrease) from derivatives designated as hedging instruments35 (3)43 14 
Foreign currency translation adjustments(38)23 (72)26 
Other comprehensive income (loss), net of taxes(18)20 (58)37 
Total comprehensive income, net of taxes$1,160 $1,136 $2,386 $2,414 




5

ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
(Unaudited)
Three Months Ended June 3, 2022
 
  Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
 Treasury Stock 
 SharesAmountSharesAmountTotal
Balances at March 4, 2022
601 $ $8,750 $24,961 $(177)(129)$(19,759)$13,775 
Net income— — — 1,178 — — — 1,178 
Other comprehensive income (loss),
net of taxes
— — — — (18)— — (18)
Re-issuance of treasury stock under stock compensation plans
— —  (117)— 1 16 (101)
Repurchases of common stock— — — — — (2)(1,200)(1,200)
Stock-based compensation— — 352 — — — — 352 
Value of shares in deferred compensation plan
— — — — — — (1)(1)
Balances at June 3, 2022
601 $ $9,102 $26,022 $(195)(130)$(20,944)$13,985 



Three Months Ended June 4, 2021
 
  Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
 Treasury Stock 
 SharesAmountSharesAmountTotal
Balances at March 5, 2021
601 $ $7,617 $20,521 $(141)(122)$(14,451)$13,546 
Net income
— — — 1,116 — — — 1,116 
Other comprehensive income (loss),
net of taxes
— — — — 20 — — 20 
Re-issuance of treasury stock under stock compensation plans
— —  (99)—  10 (89)
Repurchases of common stock— — — — — (2)(1,000)(1,000)
Stock-based compensation— — 260 — — — — 260 
Value of shares in deferred compensation plan
— — — — — — (1)(1)
Balances at June 4, 2021
601 $ $7,877 $21,538 $(121)(124)$(15,442)$13,852 
6

ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
(Unaudited)
Six Months Ended June 3, 2022
   Common StockAdditional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
 Treasury Stock 
 SharesAmountSharesAmountTotal
Balances at December 3, 2021
601 $ $8,428 $23,905 $(137)(126)$(17,399)$14,797 
Net income— — — 2,444 — — — 2,444 
Other comprehensive income (loss),
net of taxes
— — — — (58)— — (58)
Re-issuance of treasury stock under stock compensation plans
— —  (327)— 2 51 (276)
Repurchases of common stock— — — — — (6)(3,600)(3,600)
Stock-based compensation— — 674 — — — — 674 
Value of shares in deferred compensation plan
— — — — — — 4 4 
Balances at June 3, 2022
601 $ $9,102 $26,022 $(195)(130)$(20,944)$13,985 



Six Months Ended June 4, 2021
 
  Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
 Treasury Stock 
 SharesAmountSharesAmountTotal
Balances at November 27, 2020
601 $ $7,357 $19,611 $(158)(122)$(13,546)$13,264 
Net income
— — — 2,377 — — — 2,377 
Other comprehensive income (loss),
net of taxes
— — — — 37 — — 37 
Re-issuance of treasury stock under stock compensation plans
— —  (450)— 2 57 (393)
Repurchases of common stock— — — — — (4)(1,950)(1,950)
Stock-based compensation— — 520 — — — — 520 
Value of shares in deferred compensation plan
— — — — — — (3)(3)
Balances at June 4, 2021
601 $ $7,877 $21,538 $(121)(124)$(15,442)$13,852 


7

ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 Six Months Ended
 June 3,
2022
June 4,
2021
Cash flows from operating activities:  
Net income$2,444 $2,377 
Adjustments to reconcile net income to net cash provided by operating activities: 
Depreciation, amortization and accretion425 390 
Stock-based compensation674 520 
Reduction of operating lease right-of-use assets42 33 
Deferred income taxes197 210 
Unrealized losses (gains) on investments, net27 (7)
Other non-cash items2 5 
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Trade receivables, net287 (39)
Prepaid expenses and other assets(140)(258)
Trade payables60 (1)
Accrued expenses and other liabilities(187)87 
Income taxes payable(20)(26)
Deferred revenue(2)469 
Net cash provided by operating activities3,809 3,760 
Cash flows from investing activities:  
Purchases of short-term investments(524)(639)
Maturities of short-term investments349 521 
Proceeds from sales of short-term investments159 104 
Acquisitions, net of cash acquired(126)(1,470)
Purchases of property and equipment(226)(154)
Purchases of long-term investments, intangibles and other assets(30)(27)
Net cash used for investing activities(398)(1,665)
Cash flows from financing activities:  
Repurchases of common stock(3,600)(1,950)
Proceeds from re-issuance of treasury stock91 87 
Taxes paid related to net share settlement of equity awards(367)(480)
Other financing activities, net22 19 
Net cash used for financing activities(3,854)(2,324)
Effect of foreign currency exchange rates on cash and cash equivalents(36)1 
Net change in cash and cash equivalents(479)(228)
Cash and cash equivalents at beginning of period3,844 4,478 
Cash and cash equivalents at end of period$3,365 $4,250 
Supplemental disclosures: 
Cash paid for income taxes, net of refunds$260 $277 
Cash paid for interest$50 $50 


8


ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 3, 2021 on file with the SEC (our “Annual Report”).
Use of Estimates
In preparing the condensed 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 condensed consolidated financial statements and accompanying notes. 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. Our financial results for the six months ended June 4, 2021 benefited from an extra week in the first quarter of fiscal 2021 due to our 52/53 week financial calendar whereby fiscal 2022 is a 52-week year compared with fiscal 2021 which was a 53-week year.
Significant Accounting Policies
There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report.
Adopted Accounting Guidance and Accounting Pronouncements Not Yet Effective
There have been no recent accounting pronouncements, changes in accounting pronouncements or recently adopted accounting guidance during the six months ended June 3, 2022 that are of significance or potential significance to us.
9


ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
NOTE 2.  REVENUE
Segment Information
Our segment results for the three months ended June 3, 2022 and June 4, 2021 were as follows:
(dollars in millions)Digital
Media
Digital
Experience
Publishing and
Advertising
Total
Three months ended June 3, 2022
Revenue$3,200 $1,095 $91 $4,386 
Cost of revenue141 374 24 539 
Gross profit$3,059 $721 $67 $3,847 
Gross profit as a percentage of revenue96 %66 %74 %88 %
Three months ended June 4, 2021
Revenue$2,787 $938 $110 $3,835 
Cost of revenue99 319 26 444 
Gross profit$2,688 $619 $84 $3,391 
Gross profit as a percentage of revenue96 %66 %76 %88 %
Our segment results for the six months ended June 3, 2022 and June 4, 2021 were as follows:
(dollars in millions)Digital
Media
Digital
Experience
Publishing and
Advertising
Total
Six months ended June 3, 2022
Revenue$6,310 $2,152 $186 $8,648 
Cost of revenue275 726 50 1,051 
Gross profit$6,035 $1,426 $136 $7,597 
Gross profit as a percentage of revenue96 %66 %73 %88 %
Six months ended June 4, 2021
Revenue$5,646 $1,872 $222 $7,740 
Cost of revenue197 638 56 891 
Gross profit$5,449 $1,234 $166 $6,849 
Gross profit as a percentage of revenue97 %66 %75 %88 %
Revenue by geographic area for the three and six months ended June 3, 2022 and June 4, 2021 were as follows:
Three MonthsSix Months
(in millions)2022202120222021
Americas $2,524 $2,185 $4,970 $4,409 
EMEA1,157 1,026 2,293 2,078 
APAC705 624 1,385 1,253 
Total$4,386 $3,835 $8,648 $7,740 
10


ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
Revenue by major offerings in our Digital Media reportable segment for the three and six months ended June 3, 2022 and June 4, 2021 were as follows:
Three MonthsSix Months
(in millions)2022202120222021
Creative Cloud$2,605 $2,318 $5,153 $4,697 
Document Cloud595 469 1,157 949 
Total Digital Media revenue$3,200 $2,787 $6,310 $5,646 
Subscription revenue by segment for the three and six months ended June 3, 2022 and June 4, 2021 were as follows:
Three MonthsSix Months
(in millions)2022202120222021
Digital Media $3,079 $2,668 $6,074 $5,399 
Digital Experience961 817 1,893 1,629 
Publishing and Advertising30 35 61 76 
Total subscription revenue$4,070 $3,520 $8,028 $7,104 
Contract Balances
A receivable is recorded when an unconditional right to invoice and receive payment exists, such that only the passage of time is required before payment of consideration is due. Included in trade receivables on the condensed consolidated balance sheets are unbilled receivable balances which have not yet been invoiced, and are typically related to license revenue or services which are delivered prior to invoicing. As of June 3, 2022, the balance of trade receivables, net of allowances for doubtful accounts, was $1.59 billion, inclusive of unbilled receivables of $95 million. As of December 3, 2021, the balance of trade receivables, net of allowances for doubtful accounts, was $1.88 billion, inclusive of unbilled receivables of $82 million.
We maintain an allowance for doubtful accounts which reflects our best estimate of potentially uncollectible trade receivables and is based on both specific and general reserves. We maintain general reserves on a collective basis by considering factors such as historical experience, credit-worthiness, the age of the trade receivable balances, current economic conditions and a reasonable and supportable forecast of future economic conditions. The allowance for doubtful accounts was $19 million and $16 million as of June 3, 2022 and December 3, 2021, respectively.
A contract asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract assets are included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion on the condensed consolidated balance sheets. We regularly review contract asset balances for impairment, considering factors such as historical experience, credit-worthiness, age of the balance, current economic conditions and a reasonable and supportable forecast of future economic conditions. Contract asset impairments were not material for the six months ended June 3, 2022. Contract assets were $75 million and $85 million as of June 3, 2022 and December 3, 2021, respectively.
Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services, including non-cancellable and non-refundable committed funds and refundable customer deposits. Deferred revenue is recognized as revenue when transfer of control to customers has occurred. As of June 3, 2022, the balance of deferred revenue was $4.88 billion, which includes $44 million of refundable customer deposits. Arrangements with some of our enterprise customers with non-cancellable and non-refundable committed funds provide options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services. Non-cancellable and non-refundable committed funds related to these agreements comprised approximately 5% of the total deferred revenue.
As of December 3, 2021, the balance of deferred revenue was $4.88 billion. During the three and six months ended June 3, 2022, approximately $1.35 billion and $3.50 billion of revenue, respectively, was recognized that was included in the balance of deferred revenue as of December 3, 2021.
11


ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and unbilled amounts that will be recognized as revenue in future periods. As of June 3, 2022, remaining performance obligations were approximately $13.82 billion. Non-cancellable and non-refundable funds related to some of our enterprise customer agreements referred to in the paragraph above comprised approximately 5% of the total remaining performance obligations. Approximately 74% of the remaining performance obligations, excluding the aforementioned enterprise customer agreements, are expected to be recognized over the next 12 months with the remainder recognized thereafter.
Incremental costs of obtaining a contract with a customer are capitalized if we expect the benefit of those costs to be longer than one year and primarily relate to sales commissions paid to our sales force personnel. Capitalized contract acquisition costs are included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion on the condensed consolidated balance sheets. Capitalized contract acquisition costs were $638 million and $611 million as of June 3, 2022 and December 3, 2021, respectively.
We record refund liabilities for amounts that may be subject to future refunds, which include sales returns reserves and customer rebates and credits. Refund liabilities are included in accrued expenses on the condensed consolidated balance sheets. Refund liabilities were $97 million and $128 million as of June 3, 2022 and December 3, 2021, respectively.
NOTE 3.  ACQUISITIONS
Frame.io
On October 7, 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, primarily in cash consideration. The financial results of Frame.io have been included in our condensed consolidated financial statements since the date of the acquisition. Frame.io is reported as part of our Digital Media reportable segment.
The table below represents the preliminary purchase price allocation to total identifiable intangible assets acquired and net liabilities assumed based on their respective estimated fair values as of October 7, 2021. During the six months ended June 3, 2022, we recorded purchase accounting adjustments that were not material based on changes to management’s estimates and assumptions in regards to the total purchase price and its related impact to goodwill. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date. Fair values associated with the net tax liabilities assumed and their related impact to goodwill were pending finalization as of the reporting date.
(dollars in millions)AmountWeighted Average Useful Life (years)
Purchased technology$331 4
In-process research and development (1)
19 N/A
Trademarks4 3
Customer contracts and relationships3 10
Total identifiable intangible assets357 
Net liabilities assumed(39)N/A
Goodwill (2)
918 N/A
Total purchase price$1,236 
_________________________________________
(1)    Capitalized as purchased technology and considered indefinite lived until completion or abandonment of the associated research and development efforts.
(2)    Non-deductible for tax purposes.
12


ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
Wor