10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 1, 2018

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period fromto

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 and zip code)

(408) 536-6000

(Registrant’s telephone number, including area code)

 _________________________

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 website, 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “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

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. 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 number of shares outstanding of the registrant’s common stock as of June 22, 2018 was 489,662,656.

ADOBE SYSTEMS INCORPORATED

FORM 10-Q

TABLE OF CONTENTS

		Page No.
PART I—FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:	3
	Condensed Consolidated Balance Sheets June 1, 2018 and December 1, 2017	3
	Condensed Consolidated Statements of Income Three and Six Months Ended June 1, 2018 and June 2, 2017	4
	Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended June 1, 2018 and June 2, 2017	5
	Condensed Consolidated Statements of Cash Flows Six Months Ended June 1, 2018 and June 2, 2017	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41
Item 4.	Controls and Procedures	42
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	55
Signature		60
Summary of Trademarks		61

2

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

	June 1, 2018			December 1, 2017
	(Unaudited)			(*)
ASSETS
Current assets:
Cash and cash equivalents	$	2,987,986		$	2,306,072
Short-term investments	3,346,078			3,513,702
Trade receivables, net of allowances for doubtful accounts of $9,869 and $9,151, respectively	1,074,877			1,217,968
Prepaid expenses and other current assets	332,503			210,071
Total current assets	7,741,444			7,247,813
Property and equipment, net	993,486			936,976
Goodwill	5,823,792			5,821,561
Purchased and other intangibles, net	320,478			385,658
Deferred income taxes	117,970			—
Other assets	166,234			143,548
Total assets	$	15,163,404		$	14,535,556
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade payables	$	117,194		$	113,538
Accrued expenses	1,030,367			993,773
Income taxes payable	37,933			14,196
Deferred revenue	2,543,462			2,405,950
Total current liabilities	3,728,956			3,527,457
Long-term liabilities:
Debt	1,874,057			1,881,421
Deferred revenue	90,805			88,592
Income taxes payable	611,509			173,088
Deferred income taxes	—			279,941
Other liabilities	152,494			125,188
Total liabilities	6,457,821			6,075,687
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;  490,435 and 491,262 shares outstanding, respectively	61			61
Additional paid-in-capital	5,354,175			5,082,195
Retained earnings	10,471,066			9,573,870
Accumulated other comprehensive income (loss)	(129,230		)	(111,821		)
Treasury stock, at cost (110,399 and 109,572 shares, respectively), net of reissuances	(6,990,489		)	(6,084,436		)
Total stockholders’ equity	8,705,583			8,459,869
Total liabilities and stockholders’ equity	$	15,163,404		$	14,535,556

^{_________________________________________} 

(*) The condensed consolidated balance sheet as of December 1, 2017 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 SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 1, 2018			June 2, 2017			June 1, 2018			June 2, 2017
Revenue:
Subscription	$	1,923,131		$	1,483,690		$	3,716,489		$	2,867,546
Product	150,993			171,545			322,601			354,930
Services and support	121,236			116,955			235,217			231,360
Total revenue	2,195,360			1,772,190			4,274,307			3,453,836
Cost of revenue:
Subscription	186,355			142,734			351,040			283,915
Product	10,779			15,488			23,656			29,821
Services and support	84,210			81,138			165,550			162,961
Total cost of revenue	281,344			239,360			540,246			476,697
Gross profit	1,914,016			1,532,830			3,734,061			2,977,139
Operating expenses:
Research and development	374,128			299,401			722,897			584,478
Sales and marketing	646,215			553,098			1,227,172			1,073,395
General and administrative	178,040			156,929			348,480			307,737
Amortization of purchased intangibles	17,149			19,320			34,295			38,448
Total operating expenses	1,215,532			1,028,748			2,332,844			2,004,058
Operating income	698,484			504,082			1,401,217			973,081
Non-operating income (expense):
Interest and other income (expense), net	11,599			5,154			28,271			12,360
Interest expense	(20,363		)	(18,347		)	(40,262		)	(36,477		)
Investment gains (losses), net	1,079			1,729			4,075			4,286
Total non-operating income (expense), net	(7,685		)	(11,464		)	(7,916		)	(19,831		)
Income before income taxes	690,799			492,618			1,393,301			953,250
Provision for income taxes	27,632			118,228			147,058			180,414
Net income	$	663,167		$	374,390		$	1,246,243		$	772,836
Basic net income per share	$	1.35		$	0.76		$	2.53		$	1.56
Shares used to compute basic net income per share	491,914			494,371			491,993			494,492
Diluted net income per share	$	1.33		$	0.75		$	2.50		$	1.54
Shares used to compute diluted net income per share	498,252			500,351			499,166			501,032

4

ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 1, 2018			June 2, 2017			June 1, 2018			June 2, 2017
	Increase/(Decrease)						Increase/(Decrease)
Net income	$	663,167		$	374,390		$	1,246,243		$	772,836
Other comprehensive income (loss), net of taxes:
Available-for-sale securities:
Unrealized gains / losses on available-for-sale securities	(1,721		)	8,665			(24,869		)	9,690
Reclassification adjustment for recognized gains / losses on available-for-sale securities	75			(246		)	197			(406		)
Net increase (decrease) from available-for-sale securities	(1,646		)	8,419			(24,672		)	9,284
Derivatives designated as hedging instruments:
Unrealized gains / losses on derivative instruments	31,104			(4,579		)	29,767			2,130
Reclassification adjustment for recognized gains / losses on derivative instruments	(37		)	(13,065		)	(2,177		)	(31,249		)
Net increase (decrease) from derivatives designated as hedging instruments	31,067			(17,644		)	27,590			(29,119		)
Foreign currency translation adjustments	(48,713		)	47,881			(20,327		)	46,685
Other comprehensive income (loss), net of taxes	(19,292		)	38,656			(17,409		)	26,850
Total comprehensive income, net of taxes	$	643,875		$	413,046		$	1,228,834		$	799,686

5

ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	June 1, 2018			June 2, 2017
Cash flows from operating activities:
Net income	$	1,246,243		$	772,836
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	152,882			162,444
Stock-based compensation	274,810			214,359
Deferred income taxes	(400,069		)	52,275
Unrealized losses (gains) on investments, net	(1,502		)	(2,600		)
Other non-cash items	3,623			1,481
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Trade receivables, net	140,681			132,275
Prepaid expenses and other current assets	(106,612		)	14,765
Trade payables	3,656			(80,819		)
Accrued expenses	52,627			12,728
Income taxes payable	459,943			39,875
Deferred revenue	139,725			55,578
Net cash provided by operating activities	1,966,007			1,375,197
Cash flows from investing activities:
Purchases of short-term investments	(412,746		)	(1,013,823		)
Maturities of short-term investments	352,078			409,830
Proceeds from sales of short-term investments	200,458			743,234
Acquisitions, net of cash acquired	(14,614		)	(459,626		)
Purchases of property and equipment	(140,458		)	(86,200		)
Purchases of long-term investments and other assets	(13,698		)	(20,608		)
Proceeds from sale of long-term investments and other assets	2,897			764
Net cash used for investing activities	(26,083		)	(426,429		)
Cash flows from financing activities:
Purchases of treasury stock	(1,000,000		)	(500,000		)
Proceeds from reissuance of treasury stock	64,682			52,830
Taxes paid related to net share settlement of equity awards	(322,505		)	(197,845		)
Repayment of capital lease obligations	(815		)	(912		)
Net cash used for financing activities	(1,258,638		)	(645,927		)
Effect of foreign currency exchange rates on cash and cash equivalents	628			2,794
Net increase in cash and cash equivalents	681,914			305,635
Cash and cash equivalents at beginning of period	2,306,072			1,011,315
Cash and cash equivalents at end of period	$	2,987,986		$	1,316,950
Supplemental disclosures:
Cash paid for income taxes, net of refunds	$	73,508		$	48,670
Cash paid for interest	$	37,503		$	33,958
Non-cash investing activities:
Investment in lease receivable applied to building purchase	$	—		$	80,439
Issuance of common stock and stock awards assumed in business acquisitions	$	—		$	10,348

6

ADOBE SYSTEMS INCORPORATED

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 1, 2017 on file with the SEC (our “Annual Report”).

Recently Adopted Accounting Guidance

On January 26, 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2017-04, Simplifying the Test for Goodwill Impairment, which eliminated step two from the goodwill impairment test. In assessing impairment of goodwill, if it is concluded that it is more likely than not that the carrying amount of a reportable segment exceeds its fair value during the qualitative assessment, a one-step goodwill impairment test will be performed. If it is concluded during the quantitative test that the carrying amount of a reportable segment exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reportable segment. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted.

In the first quarter of 2018, we early adopted ASU 2017-04. The standard did not have an impact to our qualitative assessment for goodwill impairment that we performed in the second quarter of fiscal 2018.

Significant Accounting Policies

There have been no other material changes to our significant accounting policies during the six months ended June 1, 2018, as compared to the significant accounting policies described in our Annual Report.

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 GAAP when it becomes effective and permits the use of either the full retrospective or modified retrospective transition method. The updated standard is effective for us in the first quarter of fiscal 2019. We expect to adopt this updated standard in the first quarter of fiscal 2019 on a modified retrospective basis. We are currently evaluating the effect that the updated standard will have on our condensed consolidated financial statements and related disclosures.

While we are continuing to assess all potential impacts of the new standard, we believe there should not be a material change to the amount of consolidated revenues on an annual basis.

We expect revenue related to our 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.

We believe 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 vendor-specific objective evidence (“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

7

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

licenses and potential classification as “product” instead of “subscription” revenue on the income statement. We offer on-premise term-based software licenses bundled with maintenance and support as a deployment model for certain offerings within our Digital Experience, Digital Media, and Publishing business units. We do not expect these arrangements to have a material impact to revenue reported in annual reporting periods subsequent to adoption, however they may result in a material balance sheet impact on the date of adoption due to the application of the modified retrospective transition method. This method requires that we account for all contracts or only those contracts that are not completed contracts at the date of initial adoption, using the modified retrospective approach and not restating prior financial periods. We will record a cumulative effect of initially applying the provisions of the new standard as an adjustment to increase the opening retained earnings balance and reduce the opening deferred revenue balance.

Other expected impacts to our policies and disclosures include: earlier recognition of revenue for certain contracts due to the elimination of contingent revenue limitations, the requirement to estimate variable consideration for certain arrangements, increased allocation of revenue to and from professional services and other offerings, and changes to our financial statement disclosures such as remaining performance obligations.

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. There may be a material balance sheet impact at the period of adoption to capitalize costs of obtaining the contract as an asset, with a corresponding adjustment to opening retained earnings at the date of initial adoption. Additionally, we may have to record related deferred income taxes. We continue to evaluate the magnitude of the impact and the period over which these capitalized costs will be amortized.

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 condensed 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 risk 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 condensed consolidated financial statements and related disclosures.

With the exception of the new standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 1, 2018, as compared to the recent accounting pronouncements described in our Annual Report, that are of significance or potential significance to us.

NOTE 2. ACQUISITIONS

On December 19, 2016, we completed our acquisition of TubeMogul, a publicly held video advertising platform company. Under the acquisition method of accounting, the total purchase price was allocated to TubeMogul’s net tangible and intangible assets based upon their estimated fair values as of December 19, 2016. The total final purchase price for TubeMogul was $560.8

8

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

million of which $348.4 million, was allocated to goodwill that was non-deductible for tax purposes, $113.1 million to identifiable intangible assets and $99.3 million to net assets acquired.

Proforma financial information has not been presented for this acquisition as the impact to our condensed consolidated financial statements was not material.

Subsequent to June 1, 2018, we completed our acquisition of Magento Commerce (“Magento”), a privately-held commerce platform company, for approximately $1.68 billion in cash consideration, as well as the assumption of certain employee equity awards. The initial purchase accounting for this transaction has not yet been completed given the short period of time between the acquisition date and the issuance of these financial statements. Magento will be integrated into our Digital Experience reportable segment for financial reporting purposes in the third quarter of fiscal 2018.

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, which is reflected as a separate component of stockholders’ equity in our condensed consolidated balance sheets. Gains and losses are recognized when realized in our condensed 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.

Cash, cash equivalents and short-term investments consisted of the following as of June 1, 2018 (in thousands):

	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Current assets:
Cash	$	345,475	$	—	$	—		$	345,475
Cash equivalents:
Corporate bonds and commercial paper	21,294		3		(1		)	21,296
Money market mutual funds	2,590,037		—		—			2,590,037
Time deposits	31,178		—		—			31,178
Total cash equivalents	2,642,509		3		(1		)	2,642,511
Total cash and cash equivalents	2,987,984		3		(1		)	2,987,986
Short-term fixed income securities:
Asset-backed securities	84,710		—		(823		)	83,887
Corporate debt securities	2,451,735		647		(32,110		)	2,420,272
Foreign government securities	3,852		—		(65		)	3,787
Municipal securities	19,236		—		(303		)	18,933
U.S. Treasury securities	822,735		—		(3,536		)	819,199
Total short-term investments	3,382,268		647		(36,837		)	3,346,078
Total cash, cash equivalents and short-term investments	$	6,370,252	$	650	$	(36,838	)	$	6,334,064

9

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 debt securities	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

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 June 1, 2018 and December 1, 2017 (in thousands):

	2018					2017
	Fair  Value		Gross Unrealized Losses			Fair  Value		Gross Unrealized Losses
Corporate debt securities	$	1,806,212	$	(25,141	)	$	1,338,232	$	(5,459	)
Asset-backed securities	50,375		(525		)	64,618		(193		)
Municipal securities	17,987		(279		)	11,805		(115		)
Foreign government securities	3,787		(65		)	2,388		(8		)
U.S. Treasury securities	516,896		(2,231		)	593,296		(2,087		)
Total	$	2,395,257	$	(28,241	)	$	2,010,339	$	(7,862	)

There were 1,210 securities and 894 securities in an unrealized loss position for less than twelve months at June 1, 2018 and at December 1, 2017, respectively.

10

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 June 1, 2018 and December 1, 2017 (in thousands):

	2018					2017
	Fair  Value		Gross Unrealized Losses			Fair  Value		Gross Unrealized Losses
Corporate debt securities	$	461,358	$	(6,970	)	$	500,689	$	(4,666	)
Asset-backed securities	33,512		(298		)	32,383		(210		)
Municipal securities	945		(24		)	598		(17		)
U.S. Treasury securities	302,303		(1,305		)	338,950		(1,465		)
Total	$	798,118	$	(8,597	)	$	872,620	$	(6,358	)

There were 331 securities and 360 securities in an unrealized loss position for more than twelve months at June 1, 2018 and at December 1, 2017, 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 June 1, 2018 (in thousands):

	Amortized Cost		Estimated Fair Value
Due within one year	$	1,602,117	$	1,594,991
Due between one and two years	799,230		789,530
Due between two and three years	762,818		748,883
Due after three years	218,103		212,674
Total	$	3,382,268	$	3,346,078

We review our debt 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. The portion of the write-down related to credit loss would be recorded to interest and other income, net in our condensed consolidated statements of income. Any portion not related to credit loss would be recorded to accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our condensed consolidated balance sheets. During the six months ended June 1, 2018 and June 2, 2017, we did not consider any of our investments to be other-than-temporarily impaired.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 six months ended June 1, 2018.

The fair value of our financial assets and liabilities at June 1, 2018 was determined using the following inputs (in thousands):

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents:
Corporate bonds and commercial paper	$	21,296	$	—	$	21,296	$	—
Money market mutual funds	2,590,037		2,590,037		—		—
Time deposits	31,178		31,178		—		—
Short-term investments:
Asset-backed securities	83,887		—		83,887		—
Corporate debt securities	2,420,272		—		2,420,272		—
Foreign government securities	3,787		—		3,787		—
Municipal securities	18,933		—		18,933		—
U.S. Treasury securities	819,199		—		819,199		—
Prepaid expenses and other current assets:
Foreign currency derivatives	40,081		—		40,081		—
Other assets:
Deferred compensation plan assets	67,487		3,376		64,111		—
Total assets	$	6,096,157	$	2,624,591	$	3,471,566	$	—

Liabilities:
Accrued expenses:
Foreign currency derivatives	$	1,280	$	—	$	1,280	$	—
Other Liabilities:
Interest rate swap derivatives	10,076		—		10,076		—
Total liabilities	$	11,356	$	—	$	11,356	$	—

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of our financial assets and liabilities at December 1, 2017 was determined using the following inputs (in thousands): 

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents:
Money market mutual funds	$	2,006,741	$	2,006,741	$	—	$	—
Time deposits	18,843		18,843		—		—
Short-term investments:
Asset-backed securities	98,001		—		98,001		—
Corporate debt securities	2,454,260		—		2,454,260		—
Foreign government securities	2,388		—		2,388		—
Municipal securities	21,065		—		21,065		—
U.S. Treasury securities	937,988		—		937,988		—
Prepaid expenses and other current assets:
Foreign currency derivatives	14,198		—		14,198		—
Other assets:
Deferred compensation plan assets	56,690		2,573		54,117		—
Total assets	$	5,610,174	$	2,028,157	$	3,582,017	$	—

Liabilities:
Accrued expenses:
Foreign currency derivatives	$	1,598	$	—	$	1,598	$	—
Other liabilities:
Interest rate swap derivatives	1,058		—		1,058		—
Total liabilities	$	2,656	$	—	$	2,656	$	—

Our fixed income available-for-sale debt securities consist of high quality, investment grade securities from diverse issuers with a weighted average credit rating of AA-. We value these securities based on pricing from independent pricing vendors who 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 or inputs other than quoted prices that are observable either directly or indirectly in determining fair value, 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 Level 2. We perform routine procedures such as comparing prices obtained from multiple independent sources to ensure that appropriate fair values are recorded.

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 money market mutual funds and other mutual funds.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 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. For the three and six months ended June 1, 2018 and June 2, 2017, we determined there were no other-than-temporary impairments of our cost and equity method investments.

The fair value of our senior notes was $1.91 billion as of June 1, 2018, based on observable market prices in less active markets and categorized as Level 2. See Note 13 for further details regarding our debt.

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 condensed 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.

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 condensed 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 condensed 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—Hedges 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 condensed 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.

Cash Flow Hedging—Hedges of Forecasted Foreign Currency Revenue and Interest Rate Risk

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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 condensed 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 condensed 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 condensed consolidated statements of income.

Fair Value Hedging - Hedges of Interest Rate Risk

In fiscal 2014, we entered into interest rate swaps designated as fair value hedges related to our $900 million of 4.75% fixed interest rate senior notes due February 1, 2020. In effect, the interest rate swaps convert the fixed interest rate on these senior notes to a floating interest rate based on LIBOR. Under the terms of the swaps, we will pay monthly interest at the one-month LIBOR interest 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 13 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 condensed consolidated statements of income. The fair value of the interest rate swaps is reflected in other liabilities or other assets in our condensed consolidated balance sheets.

The fair value of derivative instruments on our condensed consolidated balance sheets as of June 1, 2018 and December 1, 2017 were as follows (in thousands):

	2018				2017
	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) (2)	$	38,918	$	—	$	12,918	$	—
Interest rate swap (3)	—		10,076		—		1,058
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts (1)	1,163		1,280		1,280		1,598
Total derivatives	$	40,081	$	11,356	$	14,198	$	2,656

^{_________________________________________} 

⁽¹⁾  Included in prepaid expenses and other current assets and accrued expenses for asset derivatives and liability derivatives, respectively, on our condensed consolidated balance sheets.

⁽²⁾  Hedging effectiveness expected to be recognized into income within the next twelve months.

⁽³⁾  Included in other liabilities on our condensed consolidated balance sheets.

15

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our condensed consolidated statements of income for the three and six months ended June 1, 2018 was as follows (in thousands):

	Three Months					Six Months
	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)	$	31,104		$	—	$	29,767		$	—
Net gain (loss) reclassified from accumulated OCI into income, net of tax(2)	$	337		$	—	$	1,359		$	—
Net gain (loss) recognized in income(3)	$	(12,084	)	$	—	$	(22,410	)	$	—
Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income(4)	$	—		$	2,784	$	—		$	(877	)

The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our condensed consolidated statements of income for the three and six months ended June 2, 2017 was as follows (in thousands):

	Three Months					Six Months
	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)	$	(4,579	)	$	—	$	2,130		$	—
Net gain (loss) reclassified from accumulated OCI into income, net of tax(2)	$	13,315		$	—	$	31,624		$	—
Net gain (loss) recognized in income(3)	$	(9,615	)	$	—	$	(15,652	)	$	—
Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income(4)	$	—		$	2,448	$	—		$	3,536

^{_________________________________________} 

⁽¹⁾  Net change in the fair value of the effective portion classified in 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 6.  GOODWILL AND PURCHASED AND OTHER INTANGIBLES

Goodwill as of June 1, 2018 and December 1, 2017 was $5.82 billion for both periods. During the six months ended June 1, 2018, decreases due to foreign currency translation adjustments were offset by the increase from an immaterial acquisition. During the second quarter of fiscal 2018, we completed our annual goodwill impairment test associated with our reporting units and determined there was no impairment of goodwill.

Purchased and other intangible assets subject to amortization as of June 1, 2018 and December 1, 2017 were as follows (in thousands): 

	2018							2017
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Purchased technology	$	184,025	$	(88,062	)	$	95,963	$	223,252	$	(110,433	)	$	112,819
Customer contracts and relationships	$	546,138	$	(363,256	)	$	182,882	$	577,484	$	(356,613	)	$	220,871
Trademarks	35,255		(17,399		)	17,856		76,255		(56,094		)	20,161
Acquired rights to use technology	61,916		(48,354		)	13,562		71,130		(54,223		)	16,907
Localization	645		(503		)	142		603		(170		)	433
Other intangibles	36,980		(26,907		)	10,073		38,693		(24,226		)	14,467
Total other intangible assets	$	680,934	$	(456,419	)	$	224,515	$	764,165	$	(491,326	)	$	272,839
Purchased and other intangible assets, net	$	864,959	$	(544,481	)	$	320,478	$	987,417	$	(601,759	)	$	385,658

Amortization expense related to purchased and other intangible assets was $34.6 million and $68.5 million for the three and six months ended June 1, 2018, respectively. Comparatively, amortization expense related to purchased and other intangible assets was $39.1 million and $77.2 million for the three and six months ended June 2, 2017, respectively. Of these amounts, $17.4 million and $34.0 million were included in cost of sales for the three and six months ended June 1, 2018, respectively, and $19.5 million and $38.2 million the three and six months ended June 2, 2017, respectively.

During the six months ended June 1, 2018, certain purchased intangibles associated with our acquisitions of Omniture, Inc. and Day Software Holding AG became fully amortized and were removed from the condensed consolidated balance sheets.

As of June 1, 2018, we expect amortization expense in future periods to be as follows (in thousands):

Fiscal Year	Purchased Technology		Other Intangible Assets
Remainder of 2018	$	18,729	$	48,720
2019	34,173		70,402
2020	31,880		39,866
2021	9,391		17,218
2022	1,622		14,151
Thereafter	168		34,158
Total expected amortization expense	$	95,963	$	224,515

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 7.  ACCRUED EXPENSES

Accrued expenses as of June 1, 2018 and December 1, 2017 consisted of the following (in thousands):

	2018		2017
Accrued compensation and benefits	$	432,871	$	417,742
Accrued media costs	113,314		134,525
Sales and marketing allowances	37,621		47,389
Accrued corporate marketing	76,412		72,087
Taxes payable	46,350		49,550
Royalties payable	42,052		46,411
Accrued interest expense	25,596		25,594
Other	256,151		200,475
Accrued expenses	$	1,030,367	$	993,773

Accrued media costs primarily relate to our advertising platform offerings 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 local and regional expenses. Other is also comprised of deferred rent related to office locations with rent escalations and foreign currency liability derivatives.

NOTE 8.  INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law, which significantly changes existing U.S. tax law and includes many provisions applicable to us, such as reducing the U.S. federal statutory tax rate, imposing a one-time transition tax on deemed repatriation of deferred foreign income, and adopting a territorial tax system. The Tax Act reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. For fiscal 2018, our blended U.S. federal statutory tax rate is 22.2%. This is the result of using the tax rate of 35% for the first month of fiscal 2018 and the reduced tax rate of 21% for the remaining eleven months of fiscal 2018. The Tax Act also required us to incur a one-time transition tax on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for foreign cash and certain other net current assets, and 8% on the remaining income, in each case reduced by certain foreign tax credits. The Tax Act also includes a provision to tax global intangible low-taxed income of foreign subsidiaries, a special tax deduction for foreign-derived intangible income, and a base erosion anti-abuse tax measure that may tax certain payments between a U.S. corporation and its subsidiaries. These additional provisions of the Tax Act will be effective for us beginning December 1, 2018.

The Tax Act was effective in the first quarter of our fiscal 2018. As of June 1, 2018, we have not completed our accounting for the tax effects of the Tax Act. During the quarter, we recorded an adjustment to the provisional tax charge based on reasonable estimates for those tax effects using the current available information and technical guidance on the interpretations of the Tax Act. In order to complete our accounting for the impact of the Tax Act, we continue to obtain, analyze and interpret additional guidance as such guidance becomes available from the U.S. Treasury Department, the Internal Revenue Service (“IRS”), state taxing jurisdictions, the FASB, and other standard-setting and regulatory bodies. New guidance or interpretations may materially impact our provision for income taxes in future periods. Additional information that is needed to complete the analysis but is currently unavailable includes, but is not limited to, the amount of earnings of certain subsidiaries as well as the amount of foreign taxes paid on such earnings for our fiscal 2018, the final determination of certain net deferred tax assets subject to remeasurement and when the related temporary differences will be settled or realized, and the tax treatment of such provisions of the Tax Act by various state tax authorities. In addition, we do not currently have sufficient information and guidance to determine the impact of certain changes to the taxation of our foreign earnings that will become effective for us in fiscal 2019. The provisional accounting impacts may change in future reporting periods until our accounting analysis is finalized, which will occur no later than one year from the enactment date, as permitted by SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.

18

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

As a result of the reduction in the federal corporate tax rate, we remeasured our deferred taxes as of the date of enactment of the Tax Act and recorded a provisional tax charge of $10 million based on the tax rate that is expected to apply when such deferred taxes are settled or realized in future periods. We have not completed our accounting for the measurement of deferred taxes. To calculate the remeasurement of deferred taxes, we estimated when the existing deferred taxes will be settled or realized. The remeasurement of deferred taxes included in our financial statements will be subject to further revisions if our current estimates are different from our actual future operating results.

As part of the adoption of a new territorial tax system we recorded a provisional transition tax expense of $118 million on deferred foreign earnings, which was comprised of $86 million for fiscal 2018 plus other ancillary effects recorded in the first fiscal quarter, long-term income taxes payable of $533 million, and a reduction in our deferred tax liability of $415 million. As a result of a change to our corporate tax structure that provided us the ability to deduct more expenses against our earnings in the U.S., we updated our Tax Act calculation during the three months ended June 1, 2018. This included an additional provisional transition tax expense of $28 million on deferred foreign earnings, a decrease of deferred tax assets by $72 million which also included utilization of credits that we estimate will be available to reduce the transition tax, and a reduction of long-term income tax payable by $44 million. To calculate the transition tax, we estimated our deferred foreign income for fiscal 2017 and 2018 because these tax returns are not complete or due. The fiscal 2017 and fiscal 2018 taxable income will be known once the respective tax returns are completed and filed. In addition, U.S. and foreign audit settlements may significantly impact the estimated transition tax. The impact of the U.S. and foreign audits on the transition tax will be known as the audits are concluded. We intend to elect to pay the federal transition tax over a period of eight years as permitted by the Tax Act. As a result, we reclassified $39 million from long-term income taxes payable to short-term income taxes payable for the first installment payment due in fiscal 2019.

Certain international provisions introduced in the Tax Act will be effective for us in fiscal 2019. We need additional information to complete our analysis on whether to adopt an accounting policy to account for the tax effects of these provisions in the period that it is subject to such tax, or to provide deferred taxes for book and tax basis differences that upon reversal may be subject to these taxes. Accordingly, we have not recorded any tax with respect to these provisions in the six months ended June 1, 2018. We will make an accounting policy election and complete the required accounting no later than the first quarter of fiscal 2019.

NOTE 9.  STOCK-BASED COMPENSATION

Summary of Restricted Stock Units

Restricted stock unit activity for the six months ended June 1, 2018 and the fiscal year ended December 1, 2017 was as follows (in thousands):

	2018		2017
Beginning outstanding balance	9,304		8,316
Awarded	3,324		5,018
Released	(3,206	)	(3,859	)
Forfeited	(376	)	(766	)
Increase due to acquisition	—		595
Ending outstanding balance	9,046		9,304

19

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Information regarding restricted stock units outstanding at June 1, 2018 and June 2, 2017 is summarized below:

	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value(*) (millions)
2018
Restricted stock units outstanding	9,046	1.36	$	2,273.3
Restricted stock units vested and expected to vest	8,224	1.30	$	2,066.9
2017
Restricted stock units outstanding	9,655	1.42	$	1,385.4
Restricted stock units vested and expected to vest	8,741	1.36	$	1,254.2

^{_________________________________________} 

^(*)  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 June 1, 2018 and June 2, 2017 were $251.31 and $143.48, respectively. 

Summary of Performance Shares

Our 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 of our Board of Directors approves the terms of each of our Performance Share Programs, including the award calculation methodology, under the terms of our 2003 Equity Incentive Plan. Shares may be earned based on the achievement of an objective relative total stockholder return measured over a three-year performance period. Performance share awards will be awarded and fully vest upon the Executive Compensation Committee's certification of the level of achievement following the three-year anniversary of each grant date. Program participants generally have the ability to receive up to 200% of the target number of shares originally granted.

In the first quarter of fiscal 2018, the Executive Compensation Committee approved the 2018 Performance Share Program.

In the first quarter of fiscal 2018, the Executive Compensation Committee also certified the actual performance achievement of participants in the 2015 Performance Share Program. Actual performance resulted in participants achieving 200% of target or approximately 1.0 million shares. The shares granted and achieved under the 2015 Performance Share Program fully vested on the three-year anniversary of the grant on January 24, 2018, if not forfeited.

In the first quarter of fiscal 2017, the Executive Compensation Committee certified the actual performance achievement of participants in the 2014 Performance Share Program. Actual performance resulted in participants achieving 198% of target or approximately 1.1 million shares. The shares granted and achieved under the 2014 Performance Share Program fully vested on the three-year anniversary of the grant on January 24, 2017, if not forfeited.

As of June 1, 2018, the shares awarded under our 2018, 2017 and 2016 Performance Share Programs are yet to be achieved.

20

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table sets forth the summary of performance share activity under our Performance Share Programs for the six months ended June 1, 2018 and the fiscal year ended December 1, 2017 (in thousands): 

	2018					2017
	Shares Granted			Maximum Shares Eligible to Receive		Shares Granted			Maximum Shares Eligible to Receive
Beginning outstanding balance	1,534			3,068		1,630			3,261
Awarded	837		(1)	628		1,082		(2)	1,040
Achieved	(1,050	)		(1,054	)	(1,135	)		(1,147	)
Forfeited	(120	)		(240	)	(43	)		(86	)
Ending outstanding balance	1,201			2,402		1,534			3,068

^{_________________________________________} 

⁽¹⁾  Included in the 0.8 million shares awarded during the six months ended June 1, 2018 were 0.5 million shares awarded for the final achievement of the 2015 Performance Share program. The remaining awarded shares were for the 2018 Performance Share Program.

⁽²⁾  Included in the 1.1 million shares awarded during the fiscal year ended December 1, 2017 were 0.6 million shares awarded for the final achievement of the 2014 Performance Share program. The remaining awarded shares were for the 2017 Performance Share Program.

Summary of Employee Stock Purchase Plan Shares

There were no stock purchases under the Employee Stock Purchase Plan (“ESPP”) during the three months ended June 1, 2018 and June 2, 2017. The expected life of the ESPP shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights during the six months ended June 1, 2018 and June 2, 2017 were as follows:

	2018	2017
Expected life (in years)	0.5 - 2.0	0.5 - 2.0
Volatility	26% - 27%	22% - 25%
Risk free interest rate	1.54% - 1.89%	0.62% - 1.2%

Employees purchased 0.7 million shares at an average price of $91.74 and 0.7 million shares at an average price of $71.71 for the six months ended June 1, 2018 and June 2, 2017, respectively. The intrinsic value of shares purchased during the six months ended June 1, 2018 and June 2, 2017 was $54.3 million and $20.4 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.

Summary of Stock Options

The Executive Compensation Committee of Adobe’s Board of Directors eliminated the use of stock option grants for all employees and the Board of Directors effective fiscal 2012 and fiscal 2014, respectively. As of June 1, 2018 and December 1, 2017, we had 0.1 million and 0.3 million stock options outstanding, respectively.

21

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Compensation Costs

As of June 1, 2018, there was $1.10 billion 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 2.1 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

Total stock-based compensation costs included in our condensed consolidated statements of income for the three months ended June 1, 2018 and June 2, 2017 were as follows (in thousands):

	2018				2017
Income Statement Classifications	Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards
Cost of revenue—subscription	$	729	$	4,526	$	878	$	4,673
Cost of revenue—services and support	1,647		2,680		1,501		1,677
Research and development	5,301		63,608		4,435		42,539
Sales and marketing	5,443		42,747		4,801		35,439
General and administrative	1,350		17,346		1,262		19,615
Total	$	14,470	$	130,907	$	12,877	$	103,943

Total stock-based compensation costs included in our condensed consolidated statements of income for the six months ended June 1, 2018 and June 2, 2017 were as follows (in thousands):

	2018				2017
Income Statement Classifications	Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards
Cost of revenue—subscription	$	1,497	$	8,470	$	1,271	$	6,834
Cost of revenue—services and support	3,663		5,666		3,224		4,742
Research and development	10,649		117,681		8,467		75,633
Sales and marketing	10,763		81,595		9,189		67,904
General and administrative	2,830		38,088		2,492		37,931
Total	$	29,402	$	251,500	$	24,643	$	193,044

NOTE 10.  STOCKHOLDERS’ EQUITY

Retained Earnings

The changes in retained earnings for the six months ended June 1, 2018 were as follows (in thousands): 

Balance as of December 1, 2017	$	9,573,870
Net income	1,246,243
Reissuance of treasury stock	(348,729		)
Adjustments to equity as a result of the Tax Act	(318		)
Balance as of June 1, 2018	$	10,471,066

22

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 condensed 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 treasury stock 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 reduction of retained earnings in our condensed consolidated balance sheets.

The components of accumulated other comprehensive income (loss) and activity, net of related taxes, as of June 1, 2018 were as follows (in thousands):

	December 1, 2017			Increase / Decrease			Reclassification Adjustments				June 1, 2018
Net unrealized gains / losses on available-for-sale securities:
Unrealized gains on available-for-sale securities	$	2,704		$	(1,865	)	$	(189	)		$	650
Unrealized losses on available-for-sale securities	(14,220		)	(23,004		)	386				(36,838		)
Total net unrealized gains / losses on available-for-sale securities	(11,516		)	(24,869		)	197			(1)	(36,188		)
Net unrealized gains / losses on derivative instruments designated as hedging instruments	(3,367		)	29,767			(2,177		)	(2)	24,223
Cumulative foreign currency translation adjustments	(96,938		)	(20,327		)	—				(117,265		)
Total accumulated other comprehensive income (loss), net of taxes	$	(111,821	)	$	(15,429	)	$	(1,980	)		$	(129,230	)

^{_________________________________________} 

⁽¹⁾  Reclassification adjustments for gains / losses on available-for-sale securities are classified in interest and other income (expense), net.

⁽²⁾  Reclassification adjustments for gains / losses on derivative instruments are classified in revenue.

The following table sets forth the taxes related to each component of other comprehensive income for the three and six months ended June 1, 2018 and June 2, 2017 (in thousands):

	Three Months						Six Months
	2018			2017			2018			2017
Available-for-sale securities:
Unrealized gains / losses	$	—		$	40		$	—		$	288
Reclassification adjustments	—			—			—			(110		)
Subtotal available-for-sale securities	—			40			—			178
Derivatives designated as hedging instruments:
Reclassification adjustments on derivative instruments	(100		)	(149		)	(1,626		)	(433		)
Foreign currency translation adjustments	—			1,261			(1,742		)	1,647
Total taxes, other comprehensive income	$	(100	)	$	1,152		$	(3,368	)	$	1,392

23

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Stock Repurchase Program

To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we may repurchase shares in the open market or enter into structured repurchase agreements with third parties. In January 2017, our Board of Directors approved our current stock repurchase program granting us authority to repurchase up to $2.5 billion in common stock through the end of fiscal 2019. In May 2018, our Board of Directors granted us another authority to repurchase up to $8 billion in common stock through the end of fiscal 2021.

During the six months ended June 1, 2018 and June 2, 2017, we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling $1 billion and $500 million, respectively. We enter into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.

The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval and the average VWAP of our stock during the interval less the agreed upon discount. During the six months ended June 1, 2018, we repurchased approximately 4.3 million shares at an average price of $208.69 through structured repurchase agreements entered into during fiscal 2017 and the six months ended June 1, 2018. During the six months ended June 2, 2017 we repurchased approximately 4.3 million shares at an average price of $118.00 through structured repurchase agreements entered into during fiscal 2016 and the six months ended June 2, 2017.

For the six months ended June 1, 2018, the prepayments were classified as treasury stock on our condensed consolidated balance sheets at the payment date, though only shares physically delivered to us by June 1, 2018 were excluded from the computation of earnings per share. As of June 1, 2018, $211.2 million of prepayment remained under this agreement.

Subsequent to June 1, 2018, as part of the $2.5 billion stock repurchase authority approved in January 2017, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $750 million. This amount will be classified as treasury stock on our condensed consolidated balance sheets. Upon completion of the $750 million stock repurchase agreement, $150 million remains under the $2.5 billion authority. We have not drawn from our new $8 billion authority as of the issuance of these financial statements.

NOTE 11.  NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income per share for the three and six months ended June 1, 2018 and June 2, 2017 (in thousands, except per share data):

	Three Months				Six Months
	2018		2017		2018		2017
Net income	$	663,167	$	374,390	$	1,246,243	$	772,836
Shares used to compute basic net income per share	491,914		494,371		491,993		494,492
Dilutive potential common shares:
Unvested restricted stock units and performance share awards	6,212		5,637		7,019		6,175
Stock options	126		343		154		365
Shares used to compute diluted net income per share	498,252		500,351		499,166		501,032
Basic net income per share	$	1.35	$	0.76	$	2.53	$	1.56
Diluted net income per share	$	1.33	$	0.75	$	2.50	$	1.54

24

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 12.  COMMITMENTS AND CONTINGENCIES

Royalties

We have royalty commitments associated with the licensing of certain offerings. Royalty expense is generally based on a dollar amount per unit sold or a percentage of the underlying revenue.

Indemnifications

In the 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 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.

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 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 to intellectual property disputes, 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 in 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.

25

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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-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 13.  DEBT

Notes

In February 2010, we issued $900 million of 4.75% senior notes due February 1, 2020 (the “2020 Notes”). Our proceeds were $900 million and were net of an issuance discount of $5.5 million. In addition, we incurred issuance costs of $6.4 million. Both the discount and issuance costs are being amortized to interest expense over the term of the 2020 Notes using the effective interest method. The effective interest rate including the discount and issuance costs is 4.92%. Interest is payable semi-annually, in arrears, on February 1 and August 1, and commenced on August 1, 2010.

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 interest rate swaps effectively convert the fixed interest rate on our 2020 Notes to a floating interest rate based on LIBOR. Under the terms of the swap, we will pay monthly interest at the one-month LIBOR interest rate plus 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.

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 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.

As of June 1, 2018, our outstanding notes payable consist of the 2020 Notes and 2025 Notes (the “Notes”) with a total carrying value of $1.87 billion which includes the fair value of the interest rate swap and is net of debt issuance costs. Based on quoted prices in inactive markets, the total fair value of the Notes was $1.91 billion as of June 1, 2018 and excludes the effect of the fair value hedge of the 2020 Notes for which we entered into interest rate swaps as described above.

The Notes rank equally with our other unsecured and unsubordinated indebtedness. We may redeem the Notes at any time, subject to a make-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 June 1, 2018, we were in compliance with all of the covenants.

In February 2018, we made semi-annual interest payments on our 2020 and 2025 Notes totaling $37.6 million.

Credit Agreement

On March 2, 2012, we entered into a five-year $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 million in commitments, for a maximum aggregate commitment of $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% 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 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. 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.

26

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 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 June 1, 2018, there were no outstanding borrowings under this Credit Agreement and we were in compliance with all covenants.

NOTE 14.  NON-OPERATING INCOME (EXPENSE)

Non-operating income (expense) for the three and six months ended June 1, 2018 and June 2, 2017 included the following (in thousands):

	Three Months						Six Months
	2018			2017			2018			2017
Interest and other income (expense), net:
Interest income	$	25,771		$	15,216		$	48,401		$	29,373
Foreign exchange gains (losses)	(14,222		)	(10,349		)	(20,111		)	(17,480		)
Realized gains on fixed income investment	6			356			190			650
Realized losses on fixed income investment	(81		)	(110		)	(386		)	(244		)
Other	125			41			177			61
Interest and other income (expense), net	$	11,599		$	5,154		$	28,271		$	12,360
Interest expense	$	(20,363	)	$	(18,347	)	$	(40,262	)	$	(36,477	)
Investment gains (losses), net:
Realized investment gains	$	503		$	431		$	4,497		$	2,390
Unrealized investment gains	576			1,298			—			1,896
Unrealized investment losses	—			—			(422		)	—
Investment gains (losses), net	$	1,079		$	1,729		$	4,075		$	4,286
Non-operating income (expense), net	$	(7,685	)	$	(11,464	)	$	(7,916	)	$	(19,831	)

NOTE 15.  SEGMENTS

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.

Effective in fiscal 2018, our business organized into three reportable segments: Digital Media, Digital Experience (formerly Digital Marketing), and Publishing (formerly Print and Publishing). These segments provide our senior management with a comprehensive financial view of our key businesses. Our segments are aligned around our two strategic growth opportunities described above, placing our Publishing business in a third segment that contains some of our mature products and solutions.

27

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Additionally, in the first quarter of fiscal 2018, we moved our legacy enterprise offerings—Adobe Connect web conferencing platform and Adobe LiveCycle, an enterprise document and forms platform—from our Digital Experience segment into Publishing, in order to more closely align our Digital Experience business with the strategic growth opportunity. Prior year information in the tables below have been reclassified to reflect this change.

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 Experience—Our Digital Experience 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.

• Publishing—Our 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. It also includes our web conferencing and document and forms platforms effective the first quarter of fiscal 2018.

Our segment results for the three months ended June 1, 2018 and June 2, 2017 were as follows (dollars in thousands):

	Digital Media			Digital Experience			Publishing			Total
Three months ended June 1, 2018
Revenue	$	1,546,424		$	585,952		$	62,984		$	2,195,360
Cost of revenue	54,760			220,696			5,888			281,344
Gross profit	$	1,491,664		$	365,256		$	57,096		$	1,914,016
Gross profit as a percentage of revenue	96		%	62		%	91		%	87		%
Three months ended June 2, 2017
Revenue	$	1,211,988		$	495,415		$	64,787		$	1,772,190
Cost of revenue	58,350			175,164			5,846			239,360
Gross profit	$	1,153,638		$	320,251		$	58,941		$	1,532,830
Gross profit as a percentage of revenue	95		%	65		%	91		%	86		%

Our segment results for the six months ended June 1, 2018 and June 2, 2017 were as follows (dollars in thousands):

	Digital Media			Digital Experience			Publishing			Total
Six months ended June 1, 2018
Revenue	$	3,006,985		$	1,140,059		$	127,263		$	4,274,307
Cost of revenue	110,229			419,488			10,529			540,246
Gross profit	$	2,896,756		$	720,571		$	116,734		$	3,734,061
Gross profit as a percentage of revenue	96		%	63		%	92		%	87		%
Six months ended June 2, 2017
Revenue	$	2,350,067		$	972,687		$	131,082		$	3,453,836
Cost of revenue	113,402			351,927			11,368			476,697
Gross profit	$	2,236,665		$	620,760		$	119,714		$	2,977,139
Gross profit as a percentage of revenue	95		%	64		%	91		%	86		%

28

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto.

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements, including statements regarding product plans, future growth, market opportunities, strategic initiatives, industry positioning, customer acquisition, the amount of recurring revenue and revenue growth. In addition, when used in this report, the words “will,” “expects,” “could,” “would,” “may,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “targets,” “estimates,” “looks for,” “looks to,” “continues” and similar expressions, as well as statements regarding our focus for the future, are generally intended to identify forward-looking statements. Each of the forward-looking statements we make in this report involves risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” in Part II, Item 1A of this report. You should carefully review the risks described herein and in other documents we file from time to time with the U.S. Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for fiscal 2017. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. 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.

BUSINESS OVERVIEW

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 personal computers, devices and media. We market our products and services directly to enterprise customers through our sales force and certain local field offices. We license our products to end 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 hosted or 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”).

Adobe was originally incorporated in California in October 1983 and was reincorporated in Delaware in May 1997. Our 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 Quarterly Report on Form 10-Q.

OPERATIONS OVERVIEW

For our second quarter of fiscal 2018, we reported strong financial results consistent with the continued execution of our long-term plans for our two strategic growth areas, Digital Media and Digital Experience (formerly 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 which provides desktop tools, mobile apps and cloud-based services for designing, creating and publishing rich and immersive content. Creative Cloud delivers value with deep, cross-product integration, frequent product updates and feature enhancements, cloud-based services including storage and syncing of files across users’ machines, access to marketplace, social and community-based features with our Adobe Stock and Behance services, app creation capabilities, tools which help assist with enterprise deployments and team collaboration, and affordable pricing for cost-sensitive customers.

We offer Creative Cloud for individuals, students, teams and enterprises. We expect Creative Cloud will drive sustained long-term revenue growth through a continued expansion of our customer base by acquiring new users on account of low cost of entry and delivery of additional features and value to Creative Cloud, as well as keeping existing customers current on our latest release. We have also built out a marketplace for Creative Cloud subscribers to enable the delivery and purchase of stock content

29

in our Adobe Stock service. Overall, our strategy with Creative Cloud is designed to enable us to increase our revenue with users, attract more new customers, and grow our recurring and predictable revenue stream that is recognized ratably.

We continue to implement strategies that will accelerate awareness, consideration and purchase of subscriptions to our Creative Cloud offerings. These strategies include increasing the value Creative Cloud users receive, such as offering new mobile applications, as well as targeted promotions and offers that attract past customers and potential users to try out and ultimately subscribe to Creative Cloud. Because of the shift towards Creative Cloud subscriptions and Enterprise Term License Agreements (“ETLAs”), revenue from perpetual licensing of our Creative products has been immaterial to our business.

We are also a market leader with our Adobe Document Cloud offerings built around our Adobe Acrobat family of products, including Adobe Acrobat Reader DC, and a set of integrated 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 believe enhances the way people manage critical documents at home, in the office and across devices, includes Adobe Acrobat DC and Adobe Sign, and a set of integrated services enabling users to create, review, approve, sign and track documents whether on a desktop or mobile device. Adobe Acrobat DC, 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 management uses to assess the health and trajectory of our overall Digital Media segment. 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 adjust our reported ARR on an annual basis to reflect any material exchange rates changes. Our reported ARR results in fiscal 2018 are based on currency rates set at the start of fiscal 2018 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 the second quarter of fiscal 2018 was $5.37 billion, up from $4.77 billion at the end of fiscal 2017. Document Cloud ARR exiting the second quarter of fiscal 2018 was $694 million, up from $614 million at the end of fiscal 2017. Total Digital Media ARR grew to $6.06 billion at the end of the second quarter of fiscal 2018, up from $5.39 billion at the end of fiscal 2017.

Our success in driving growth in ARR has positively affected our revenue growth. Creative revenue in the second quarter of fiscal 2018 was $1.30 billion, up from $1.01 billion in the second quarter of fiscal 2017, representing 29% year-over-year growth. Document Cloud revenue in the second quarter of fiscal 2018 was $243.0 million, up from $199.9 million in the second quarter of fiscal 2017 as we continue to transition Document Cloud to a subscription-based model. Total Digital Media segment revenue grew to $1.55 billion in the second quarter of fiscal 2018, up from $1.21 billion in the second quarter of fiscal 2017, representing 28% year-over-year growth.

We are a market leader in the fast-growing category addressed by our Digital Experience segment. Our Digital Experience 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.

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Our hierarchy of solutions in the Digital Experience segment, available in our 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 TubeMogul during the first quarter of fiscal 2017.

In addition to chief marketing officers and digital marketers, users of our Adobe Experience 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 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 Adobe Experience Cloud 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. We achieved record Adobe Experience Cloud revenue of $586.0 million in the second quarter of fiscal 2018, representing 18% year-over-year growth. Driving the increase in Adobe Experience Cloud revenue was the increase in subscription revenue which grew to $469.4 million in the second quarter of fiscal 2018 from $377.1 million in the second quarter of fiscal 2017, representing 24% year-over-year growth.

In June 2018, we completed our acquisition of Magento Commerce (“Magento”) and we will begin to integrate Magento into our Digital Experience business in the third quarter of fiscal 2018. We expect that the addition of Magento and continued demand across our portfolio of Adobe Experience Cloud solutions will drive revenue growth in future years.

In the first quarter of fiscal 2018, in order to more closely align our Digital Experience segment with the strategic growth opportunity, we moved two legacy enterprise offerings, LiveCycle and Connect, from our Digital Experience segment to our Publishing segment.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our condensed consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the 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 and income taxes have the greatest potential impact on our condensed 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.

There have been no significant changes in our critical accounting policies and estimates during the six months ended June 1, 2018, as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 1, 2017.

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Recent Accounting Pronouncements

RESULTS OF OPERATIONS

Financial Performance Summary for the Second Quarter of Fiscal 2018

• Total Digital Media ARR of approximately $6.06 billion as of June 1, 2018increased by $679 million, or 13%, from $5.39 billion as of December 1, 2017. The change in our Digital Media ARR is primarily due to strong adoption of our Creative Cloud and Adobe Document Cloud subscription offerings.

• Creative revenue during the three months ended June 1, 2018 of $1.30 billion increased by $291.3 million, or 29% compared with the year-ago period. The increase was primarily due to the increase in subscription revenue associated with our Creative Cloud offerings.

• Adobe Experience Cloud revenue of $586.0 million during the three months ended June 1, 2018increased by $90.6 million, or 18%, compared with the year-ago period. The increase was primarily due to the increase in subscription revenue across our offerings.

• Our total deferred revenue of $2.63 billion as of June 1, 2018increased by $139.7 million, or 6%, from $2.49 billion as of December 1, 2017 primarily due to increases in new contracts and the timing of renewals for our Digital Experience hosted service offerings.

• Cost of revenue of $281.3 million during the three months ended June 1, 2018increased by $42.0 million, or 18%, compared with the year-ago period primarily due to increases in media costs associated with our Advertising Cloud offerings, and hosting services and data center costs.

• Operating expenses of $1.22 billion during the three months ended June 1, 2018increased by $186.8 million, or 18%, compared with the year-ago period primarily due to increases in stock-based compensation expenses and base compensation costs associated with headcount growth.

• Net income of $663.2 million during the three months ended June 1, 2018increased by $288.8 million, or 77%, compared with the year-ago period primarily due to increases in subscription revenue and, to a lesser extent, the decrease in the provision for income taxes.

• Net cash flow from operations of $1.97 billion during the six months ended June 1, 2018 increased by $590.8 million, or 43%, compared with the year-ago period primarily due to higher net income.

Revenue for the Three and Six Months Ended June 1, 2018 and June 2, 2017 (dollars in millions)

	Three Months								Six Months
	2018			2017			% Change		2018			2017			% Change
Subscription	$	1,923.1		$	1,483.7		30	%	$	3,716.5		$	2,867.5		30	%
Percentage of total revenue	88		%	84		%			87		%	83		%
Product	151.0			171.5			(12	)%	322.6			354.9			(9	)%
Percentage of total revenue	7		%	10		%			8		%	10		%
Services and support	121.3			117.0			4	%	235.2			231.4			2	%
Percentage of total revenue	5		%	6		%			5		%	7		%
Total revenue	$	2,195.4		$	1,772.2		24	%	$	4,274.3		$	3,453.8		24	%

^{_________________________________________} 

^(*)  Percentage is less than 1%.

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 Experience Cloud and Document Cloud services. We recognize subscription revenue ratably over the term of agreements with our customers, beginning on the commencement of the service.

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As described in Note 15 of our notes to condensed consolidated financial statements, we have the following reportable segments: Digital Media, Digital Experience and Publishing. Subscription revenue by reportable segment for the three and six months ended June 1, 2018 and June 2, 2017 is as follows (dollars in millions):

	Three Months						Six Months
	2018		2017		% Change		2018		2017		% Change
Digital Media	$	1,425.9	$	1,082.4	32	%	$	2,760.6	$	2,089.2	32	%
Digital Experience	469.4		377.1		24	%	900.3		730.0		23	%
Publishing	27.8		24.2		15	%	55.6		48.3		15	%
Total subscription revenue	$	1,923.1	$	1,483.7	30	%	$	3,716.5	$	2,867.5	30	%

Our services and support revenue is comprised of consulting, training and maintenance and support, primarily related to the licensing of our enterprise products and the sale of our hosted Adobe Experience 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.

Segment Information (dollars in millions)

	Three Months								Six Months
	2018			2017			% Change		2018			2017			% Change
Digital Media	$	1,546.4		$	1,212.0		28	%	$	3,006.9		$	2,350.1		28	%
Percentage of total revenue	70		%	68		%			70		%	68		%
Digital Experience	586.0			495.4			18	%	1,140.1			972.7			17	%
Percentage of total revenue	27		%	28		%			27		%	28		%
Publishing	63.0			64.8			(3	)%	127.3			131.0			(3	)%
Percentage of total revenue	3		%	4		%			3		%	4		%
Total revenue	$	2,195.4		$	1,772.2		24	%	$	4,274.3		$	3,453.8		24	%

Digital Media

Revenue from Digital Media increased$334.4 million and $656.8 million during the three and six months ended June 1, 2018, as compared to the three and six months ended June 2, 2017 primarily driven by increases in revenue associated with our Creative offerings.

Revenue associated with our Creative offerings, which includes our Creative Cloud, perpetually licensed Creative and stock photography offerings, increased during the three and six months ended June 1, 2018 as compared to the three and six months ended June 2, 2017. The increase was primarily due to an increase in subscription revenue associated with our Creative Cloud offerings driven by increases in individual, team and enterprise subscriptions. To a lesser extent, increases in revenue associated with our stock photography offerings also contributed to the increase in revenue.

Adobe Document Cloud revenue, which includes our Acrobat product family and Adobe Sign service, increased during the three and six months ended June 1, 2018 as compared to the year ago periods primarily due to increases in Document Cloud subscription revenue.

Digital Experience

Revenue from Digital Experience increased$90.6 million and $167.4 million during the three and six months ended June 1, 2018, as compared to the three and six months ended June 2, 2017 primarily due to increases in subscription revenue associated with our offerings. Continued adoption of our AEM offerings which is part of our Marketing Cloud and growth in our Advertising Cloud largely contributed to subscription revenue year-over-year increases.

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Geographical Information (dollars in millions)

	Three Months								Six Months
	2018			2017			% Change		2018			2017			% Change
Americas	$	1,239.6		$	1,026.7		21	%	$	2,410.2		$	2,002.5		20	%
Percentage of total revenue	57		%	58		%			57		%	58		%
EMEA	621.8			475.9			31	%	1,209.1			935.0			29	%
Percentage of total revenue	28		%	27		%			28		%	27		%
APAC	334.0			269.6			24	%	655.0			516.3			27	%
Percentage of total revenue	15		%	15		%			15		%	15		%
Total revenue	$	2,195.4		$	1,772.2		24	%	$	4,274.3		$	3,453.8		24	%

Overall revenue during the three and six months ended June 1, 2018 increased in all geographic regions as compared to the three and six months ended June 2, 2017 primarily due to increases in Digital Media and 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.

Foreign currency impacts to revenue for the three and six months ended June 1, 2018 are shown below.

(in millions)	Three Months		Six Months
Revenue impact:	Increase/ (Decrease)
Euro	$	35.9	$	62.5
British Pound	9.4		13.7
Japanese Yen	1.8		1.2
Other currencies	4.2		9.6
Total revenue impact	51.3		87.0
Hedging impact:
Euro	0.3		0.3
Japanese Yen	—		1.0
Total hedging impact	0.3		1.3
Total impact	$	51.6	$	88.3

During the three and six months ended June 1, 2018, the relative weakness of the U.S. Dollar caused revenue in EMEA and other currencies measured in U.S. Dollar equivalents to increase as compared to the year-ago periods.

Cost of Revenue for the Three and Six Months Ended June 1, 2018 and June 2, 2017 (dollars in millions)

	Three Months								Six Months
	2018			2017			% Change		2018			2017			% Change
Subscription	186.3			$	142.7		31	%	$	351.0		$	283.9		24	%
Percentage of total revenue	8		%	8		%			8		%	8		%
Product	10.8			15.5			(30	)%	23.7			29.8			(20	)%
Percentage of total revenue	—		%	1		%			1		%	1		%
Services and support	84.2			81.2			4	%	165.5			163.0			2	%
Percentage of total revenue	4		%	5		%			4		%	5		%
Total cost of revenue	$	281.3		$	239.4		18	%	$	540.2		$	476.7		13	%

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Subscription

Cost of subscription revenue consists of third-party royalties and expenses related to operating our network infrastructure, including depreciation expense 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 Advertising Cloud offerings.

Cost of subscription revenue increased during the three and six months ended June 1, 2018 as compared to the three and six months ended June 2, 2017 due to the following:

	% Change 2018-2017 QTD		% Change 2018-2017 YTD
Media costs	18	%	11	%
Hosting services and data center costs	5		5
Royalty costs	5		5
Incentive compensation, cash and stock-based	2		3
Base compensation and related benefits associated with headcount	—		1
Various individually insignificant items	1		(1	)
Total change	31	%	24	%

Product

Cost of product revenue includes product packaging, third-party royalties, excess and obsolete inventory, localization costs, purchased intangibles and acquired rights to use technology and the costs associated with the manufacturing of our products.

Cost of product revenue decreased during the three and six months ended June 1, 2018 as compared to the three and six months ended June 2, 2017 primarily due to decreases in royalty costs.

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 slightly during the three and six months ended June 1, 2018 as compared to the three and six months ended June 2, 2017 primarily due to increases in stock-based compensation expenses.

Operating Expenses for the Three and Six Months Ended June 1, 2018 and June 2, 2017 (dollars in millions)

	Three Months								Six Months
	2018			2017			% Change		2018			2017			% Change
Research and development	$	374.1		$	299.4		25	%	$	722.9		$	584.5		24	%
Percentage of total revenue	17		%	17		%			17		%	17		%
Sales and marketing	646.2			553.1			17	%	1,227.1			1,073.4			14	%
Percentage of total revenue	29		%	31		%			29		%	31		%
General and administrative	178.0			156.9			13	%	348.5			307.7			13	%
Percentage of total revenue	8		%	9		%			8		%	9		%
Amortization of purchased intangibles	17.2			19.3			(11	)%	34.3			38.5			(11	)%
Percentage of total revenue	1		%	1		%			1		%	1		%
Total operating expenses	$	1,215.5		$	1,028.7		18	%	$	2,332.8		$	2,004.1		16	%

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Research and Development, Sales and Marketing, and General and Administrative Expenses

The increases in research and development, sales and marketing and general and administrative expenses during the three and six months ended June 1, 2018 as compared to the three and six months ended June 2, 2017 were primarily due to increases in stock-based compensation expenses and base compensation and related benefits costs associated with headcount growth.

Research and Development

Research and development expenses consist primarily of salary and benefit expenses for software developers, contracted development efforts, third party fees for hosting services, related facilities costs and expenses associated with computer equipment used in software development.

Research and development expenses increased during the three and six months ended June 1, 2018 as compared to the three and six months ended June 2, 2017 due to the following:

	% Change 2018-2017 QTD		% Change 2018-2017 YTD
Incentive compensation, cash and stock-based	13	%	13	%
Base compensation and related benefits associated with headcount	7		8
Professional and consulting fees	2		2
Various individually insignificant items	3		1
Total change	25	%	24	%

We believe that investments in research and development, including the recruiting and hiring of software developers, are critical to remain competitive in the marketplace and are directly related to continued timely development of new and enhanced offerings and solutions. We will continue to focus on long-term opportunities available in our end markets and make significant investments in the development of our subscription and service offerings, applications and tools.

Sales and Marketing

Sales and marketing expenses consist primarily of salary and benefit expenses, 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 as a percentage of revenue during the three and six months ended June 1, 2018 decreased year over year primarily due to our revenue growing at a faster pace compared with the increases in sales and marketing expenses. 

Sales and marketing expenses increased during the three and six months ended June 1, 2018 as compared to the three and six months ended June 2, 2017 due to the following:

	% Change 2018-2017 QTD		% Change 2018-2017 YTD
Incentive compensation, cash and stock-based	5	%	5	%
Base compensation and related benefits associated with headcount	4		4
Marketing spend related to offering launches and overall marketing efforts	3		2
Professional and consulting fees	1		—
Various individually insignificant items	4		3
Total change	17	%	14	%

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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 during the three and six months ended June 1, 2018 as compared to the three and six months ended June 2, 2017 due to the following:

	% Change 2018-2017 QTD		% Change 2018-2017 YTD
Professional and consulting fees	10	%	7	%
Incentive compensation, cash and stock based	2		3
Various individually insignificant items	1		3
Total change	13	%	13	%

Professional and consulting fees increased during the three and six months ended June 1, 2018 as compared to the three and six months ended June 2, 2017 primarily due to incurred transaction costs associated with our acquisition of Magento, which closed subsequent to June 1, 2018.

Non-Operating Income (Expense), Net for the Three and Six Months Ended June 1, 2018 and June 2, 2017 (dollars in millions)

	Three Months								Six Months
	2018			2017			% Change		2018			2017
Interest and other income (expense), net	$	11.6		$	5.2		**		$	28.3		$	12.4		**
Percentage of total revenue	1		%	*					1		%	*
Interest expense	(20.4		)	(18.4		)	11	%	(40.3		)	(36.5		)	10	%
Percentage of total revenue	(1		)%	(1		)%			(1		)%	(1		)%
Investment gains (losses), net	1.1			1.7			(35	)%	4.1			4.3			(5	)%
Percentage of total revenue	*			*					*			*
Total non-operating income (expense), net	$	(7.7	)	$	(11.5	)	(33	)%	$	(7.9	)	$	(19.8	)	(60	)%

^{_________________________________________} 

^(*)  Percentage is less than 1%.

^(**)  Percentage is not meaningful.

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 programs.

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. See Notes 5 and 13 of our notes to condensed consolidated financial statements for further details regarding our senior notes and interest rate swaps.

Investment Gains (Losses), Net

Investment gains (losses), net consists principally of unrealized holding gains and losses associated with our deferred compensation plan assets which are classified as trading securities, and gains and losses associated with our direct and indirect investments in privately held companies.

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Provision for Income Taxes for the Three and Six Months Ended June 1, 2018 and June 2, 2017 (dollars in millions)

	Three Months								Six Months
	2018			2017			% Change		2018			2017			% Change
Provision	$	27.6		$	118.2		(77	)%	$	147.1		$	180.4		(18	)%
Percentage of total revenue	1		%	7		%			3		%	5		%
Effective tax rate	4		%	24		%			11		%	19		%

Our effective tax rate decreased by 20 percentage points and eight percentage points for the three and six months ended June 1, 2018, respectively, as compared to the three and six months ended June 2, 2017. The lower effective tax rates were primarily due to the effects of the Tax Act enacted on December 22, 2017 and a change to our corporate tax structure from which we serve our foreign customers that provided us the ability to deduct more expenses against our earnings in the U.S.

The Tax Act transitions the U.S. tax system to a new territorial system and lowers the statutory corporate tax rate from 35% to 21%. Reduction of the statutory federal corporate tax rate to 21% became effective on January 1, 2018. In fiscal 2018, our statutory federal corporate tax rate is a blended rate of 22.2%, which will be reduced to 21% in fiscal 2019 and thereafter.

We have made provisional estimates of the accounting impacts of certain provisions of the Tax Act. We continue to obtain, analyze and interpret additional guidance issued and will revise our estimates as additional information becomes available. The provisional accounting impacts may change in future reporting periods until the accounting is finalized, which will occur no later than one year from the enactment date.

As part of the adoption of a new territorial tax system applicable to foreign earnings, the Tax Act requires us to pay a one-time tax (“transition tax”) on previously untaxed earnings and profits of our foreign subsidiaries at a rate of 15.5% on such earnings represented by foreign cash and certain other net current assets, and 8% on the remaining earnings, in each case reduced by certain foreign tax credits. In the first quarter of fiscal 2018, we recorded a provisional transition tax expense of $118 million on deferred foreign earnings, which was comprised of $86 million for fiscal 2018 plus other ancillary effects recorded in the first fiscal quarter, long-term income taxes payable of $533 million, and a reduction in our deferred tax liability of $415 million. As a result of a change to our corporate tax structure, we updated our Tax Act calculation during the three months ended June 1, 2018. This included an additional provisional transition tax expense of $28 million on deferred foreign earnings, a decrease of deferred tax assets by $72 million which also included utilization of credits that we estimate will be available to reduce the transition tax, and a reduction of long-term income taxes payable by $44 million. We intend to elect to pay the federal transition tax over a period of eight years as permitted by the Tax Act. As a result, we reclassified $39 million from long-term income taxes payable to short-term income taxes payable for the first installment payment due in fiscal 2019.

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. As part of the adoption of a territorial tax system, the Tax Act also provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017 that were not subject to the one-time transition tax. As we repatriate the undistributed earnings of our foreign subsidiaries for use in the U.S., the earnings from our foreign subsidiaries will generally not be subject to U.S. federal tax.

Accounting for Uncertainty in Income Taxes

The gross liabilities for unrecognized tax benefits excluding interest and penalties were $156.2 million and $164.9 million as of June 1, 2018 and June 2, 2017, respectively. If the total unrecognized tax benefits benefits at June 1, 2018 and June 2, 2017 were recognized in the future, $111.2 million and $135.7 million of unrecognized tax benefits would decrease the respective effective tax rates, which were net of estimated $45.0 million and $29.2 million federal benefits related to deducting certain payments on future state tax returns.

The combined amount of accrued interest and penalties related to tax positions taken on our tax returns were approximately $22.9 million and $19.5 million for the six months ended June 1, 2018 and June 2, 2017, respectively. These amounts were included in long-term income taxes payable in their respective years.

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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 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 $35.0 million. 

LIQUIDITY AND CAPITAL RESOURCES

This data should be read in conjunction with our condensed consolidated statements of cash flows.

	As of
(in millions)	June 1, 2018		December 1, 2017
Cash and cash equivalents	$	2,988.0	$	2,306.1
Short-term investments	$	3,346.1	$	3,513.7
Working capital	$	4,012.5	$	3,720.4
Stockholders’ equity	$	8,705.6	$	8,459.9

A summary of our cash flows is as follows:

	Six Months Ended
(in millions)	June 1, 2018			June 2, 2017
Net cash provided by operating activities	$	1,966.0		$	1,375.1
Net cash used for investing activities	(26.1		)	(426.4		)
Net cash used for financing activities	(1,258.6		)	(645.9		)
Effect of foreign currency exchange rates on cash and cash equivalents	0.6			2.8
Net increase in cash and cash equivalents	$	681.9		$	305.6

Our primary source of cash is receipts from revenue. Other sources of cash are proceeds from participation in the employee stock purchase plan. The primary uses of cash are our stock repurchase program as described below, payroll-related expenses, general operating expenses including marketing, travel and office rent, and cost of revenue. Other uses of cash include business acquisitions and purchases of property and equipment.

Cash Flows from Operating Activities

Net cash provided by operating activities of $1.97 billion for the six months ended June 1, 2018 was primarily comprised of net income plus the net effect of non-cash items, including an adjustment to deferred income taxes related to the Tax Act. The primary working capital sources of cash were net income coupled with an increase in income taxes payable, decrease in accounts receivable, and an increase in deferred revenue. The increase in income taxes payable was primarily driven by the provisional transition tax liability recorded pursuant to the Tax Act. The decrease in accounts receivable was primarily driven by improved revenue linearity. The increase in deferred revenue was principally due to increases in Digital Experience hosted services and Digital Media site and term licenses. The primary working capital use of cash was due to increases in prepaid expenses, which was primarily due to an increase in prepaid payroll and employee benefits.

Cash Flows from Investing Activities

Net cash used for investing activities of $26.1 million for the six months ended June 1, 2018 was primarily due to purchases of short-term investments and property and equipment, and an immaterial acquisition. These cash outflows were offset in part by proceeds from sales and maturities of short-term investments.

Cash Flows from Financing Activities

Net cash used for financing activities of $1.26 billion for the six months ended June 1, 2018 was primarily due to payments for our treasury stock repurchases and taxes related to net share settlement of equity awards, offset by proceeds from reissuance of treasury stock. See the section titled “Stock Repurchase Program” discussed below.

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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.

Other Liquidity and Capital Resources Considerations

Our existing cash, cash equivalents and investment balances may fluctuate during fiscal 2018 due to changes in our planned cash outlay, including changes in incremental costs such as direct and integration costs related to our acquisitions.

As a result of the Tax Act enacted on December 22, 2017, all historical undistributed foreign subsidiary earnings were subject to a mandatory one-time transition tax. For the three months ended March 2, 2018, we recorded a provisional transition tax liability of $533 million and state taxes of $3 million. During the three months ended June 1, 2018, we recorded an adjustment to the provisional transition tax liability resulting in an adjusted balance of $489 million. Under the Tax Act, the transition tax is payable over eight years beginning in fiscal 2019, with 8% due in each of the first five years, 15% in year six, 20% in year seven, and 25% in year eight. As we repatriate the undistributed earnings of our foreign subsidiaries for use in the U.S., the earnings from our foreign subsidiaries will generally not be subject to U.S. federal tax. We continue to evaluate the impact of the Tax Act and the future cash needs of our global operations to determine the amount of foreign earnings that is not necessary to be permanently reinvested in our foreign subsidiaries.

Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the risks detailed in Part II, Item 1A titled “Risk Factors”. However, based on our current business plan and revenue prospects, we believe that our existing cash, cash equivalents and investment balances, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for the next twelve months.

On March 2, 2012, we entered into a five-year $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 June 1, 2018, there were no outstanding borrowings under this Credit Agreement and the entire $1 billion credit line remains available for borrowing.

As of June 1, 2018, the amount outstanding under our senior notes was $1.9 billion, consisting of $900 million of 4.75% senior notes due February 1, 2020 and $1 billion of 3.25% senior notes due February 1, 2025.

Subsequent to June 1, 2018, we completed our acquisition of Magento, a privately-held commerce platform company, for approximately $1.68 billion in cash consideration, as well as the assumption of certain employee equity awards. See Note 2 of our Notes to Consolidated Financial Statements for further information regarding this acquisition.

Our short-term investment portfolio is primarily invested in corporate debt securities, U.S. Treasury securities, foreign government securities, municipal securities and asset-backed securities. We use professional investment management firms to manage a large portion of our invested cash.

Stock Repurchase Program

To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we may repurchase shares in the open market or enter into structured repurchase agreements with third parties. In January 2017, our Board of Directors approved our current stock repurchase program granting us authority to repurchase up to $2.5 billion in common stock through the end of fiscal 2019. In May 2018, our Board of Directors granted us another authority to repurchase up to $8 billion in common stock through the end of fiscal 2021.

During the six months ended June 1, 2018 and June 2, 2017, we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling $1.0 billion and $500 million, respectively. We enter into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.

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The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval and the average VWAP of our stock during the interval less the agreed upon discount. During the six months ended June 1, 2018, we repurchased approximately 4.3 million shares at an average price of $208.69 through structured repurchase agreements entered into during fiscal 2017 and the six months ended June 1, 2018. During the six months ended June 2, 2017 we repurchased approximately 4.3 million shares at an average price of $118.00 through structured repurchase agreements entered into during fiscal 2016 and the six months ended June 2, 2017.

For the six months ended June 1, 2018, the prepayments were classified as treasury stock on our condensed consolidated balance sheets at the payment date, though only shares physically delivered to us by June 1, 2018 were excluded from the computation of earnings per share. As of June 1, 2018, $211.2 million of prepayment remained under this agreement.

Subsequent to June 1, 2018, as part of the $2.5 billion stock repurchase authority approved in January 2017, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $750 million. This amount will be classified as treasury stock on our condensed consolidated balance sheets. Upon completion of the $750 million stock repurchase agreement, $150 million remains under the $2.5 billion authority. We have not drawn from our new $8 billion authority as of the issuance of these financial statements.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Our principal commitments as of June 1, 2018 consist of obligations under operating leases, royalty agreements and various service agreements. There have been no material changes in those obligations during the six months ended June 1, 2018. See Notes 12 and 13 of our notes to condensed consolidated financial statements for more detailed information regarding our contractual commitments.

Senior Notes

Interest on our senior notes is payable semi-annually, in arrears on February 1 and August 1. At June 1, 2018, our maximum commitment for interest payments was $313.0 million for the remaining duration of our senior notes.

Covenants

Our credit facility contains a financial covenant requiring us not to exceed a maximum leverage ratio. As of June 1, 2018, we were in compliance with this covenant. We believe this covenant will not impact our credit or cash in the coming fiscal year or restrict our ability to execute our business plan. Our senior notes do not contain any financial covenants.

Under the terms of our credit agreement 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.

Royalties

We have certain royalty commitments associated with the licensing of certain offerings. Royalty expense is generally based on a dollar amount per unit sold or a percentage of the underlying revenue.

Indemnifications

In the normal course of business, we provide indemnifications of varying scope to customers 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 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We believe that there have been no material changes in our market risk exposures for the six months ended June 1, 2018, as compared with those discussed in our Annual Report on Form 10-K for the fiscal year ended December 1, 2017.

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ITEM 4.  CONTROLS AND PROCEDURES

Based on their evaluation as of June 1, 2018, 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 Quarterly Report on Form 10-Q 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.

There were no changes in our internal control over financial reporting during the quarter ended June 1, 2018 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. 

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 error 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.

PART II—OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

ITEM 1A.  RISK FACTORS

As previously discussed, our actual results could differ materially from our forward-looking statements. Below we discuss some of the factors that could cause 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 technology products and services and enhancing existing offerings 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 misjudge customer needs in the future, our new products and services may not succeed and our revenues and earnings may be harmed. Additionally, any delay in the development, acquisition, marketing or launch of a new offering or enhancement to an existing offering could result in customer attrition or impede our ability to attract new customers, causing a decline in our revenue, earnings or stock price and weakening our competitive position.

We offer our products on a variety of hardware platforms. Consumers continue to migrate from personal computers to tablet and mobile devices. If we cannot continue adapting our products to tablet and mobile devices, or if our competitors can adapt their products 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.

Our competitive position and results of operations could be harmed if we do not compete effectively.

The markets for our products and services are characterized by intense competition, new industry standards, evolving distribution models, limited barriers to entry, disruptive technology developments, short product life cycles, customer price sensitivity and frequent product introductions (including alternatives with limited functionality available at lower costs or free of charge). Any of these factors could create downward pressure on pricing and gross margins and could adversely affect our renewal and upsell 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 in a timely and cost-effective manner, meet changing customer expectations and needs, extend our core technology into new applications, and anticipate emerging standards, business models, software delivery methods and other technological 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

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customers might select the products and services of our competitors, causing a loss of our market share. In addition, consolidation has occurred among some of our competitors. Further consolidations in these markets may subject us to increased competitive pressures and may harm our results of operations.

For additional information regarding our competition and the risks arising out of the competitive environment in which we operate, see the section entitled “Competition” contained in Part I. Item 1 of our Annual Report on Form 10-K for the fiscal year ended December 1, 2017.

Introduction of new technology could harm our business and results of operations.

The expectations and needs of technology consumers are constantly evolving. Our future success depends on a variety of factors, including our continued ability to innovate, introduce new products and services efficiently, enhance and integrate our products and services in a 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 one another and other companies’ offerings creates an increasingly complex ecosystem that is partly reliant on third parties. 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 our business could be harmed.

The introduction of certain technologies may reduce the effectiveness of our products. 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 delete cookies through their browsers or “ad-blocking” software or applications. 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 methods, software or applications that block cookies could harm our business.

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 need for our sales representatives to educate customers about the use and benefit 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 their testing and evaluation of our products 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 various decision makers within their organizations due to the complexity of our solutions 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 operations.  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 extended sales cycle for these products and services makes it difficult to predict when a given sales cycle will close.

Subscription offerings could create risks related to the timing of revenue recognition.

We generally recognize revenue from subscription offerings ratably over the terms of their subscription agreements, which range from 1 to 36 months. As a result, most of the subscription revenue we report in each quarter is the result of subscription agreements entered into during previous quarters. Any reduction in new or renewed subscriptions in a quarter may not be reflected in our revenue results until a later quarter. Declines in new or renewed subscriptions may decrease our revenue in future quarters.

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Lower sales, reduced demand for our products and services, and increases in our attrition rate may not be fully reflected in our results of operations until future periods. Our subscription model could also make it difficult for us to rapidly increase our revenue 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.

Additionally, in connection with our sales efforts to enterprise customers and our use of ETLAs, a number of factors could affect our revenue, including longer-than-expected sales and implementation cycles, potential deferral of revenue due to multiple-element revenue arrangements and alternative licensing arrangements. If any of our assumptions about revenue from our subscription-based offerings prove incorrect, our actual results may vary materially from those anticipated.

If our customers fail to renew subscriptions in accordance with our expectations, our future revenue and operating results could suffer.

Our Adobe Experience Cloud, Creative Cloud, and Document Cloud offerings typically involve subscription based offerings pursuant to product and service agreements. Revenue from our subscription customers is generally recognized ratably over the term of their agreements, which typically range from 1 to 36 months. Our customers have no obligation to renew their subscriptions for our services after the expiration of their initial subscription period, and customers may not renew their subscriptions at the same or higher level of service, for the same number of seats or for the same duration of time, if at all. Moreover, under certain circumstances, some of our customers have the right to cancel their agreements prior to the expiration of the terms. Our varied customer base combined with the flexibility we offer in the length of our subscription-based agreements complicates our ability to precisely forecast renewal rates. Therefore, we cannot provide 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 offerings, the prices of offerings and those offered by our competitors, the actual or perceived information security of our systems and services, decreases in the size of 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 or if they renew on terms less favorable to us, our revenue may decline.

Security 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, or 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

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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 collect and report 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 conduct business globally in countries that may 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. Government regulators, privacy advocates and class action attorneys are increasingly scrutinizing how companies collect, process, use, store, share and transmit personal data. This increased scrutiny may result in new interpretations of existing laws, thereby further impacting Adobe’s business. 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. While we have invested in GDPR readiness, these new laws, regulations and codes may affect our ability (and our enterprise customers’ ability) 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 business models effectively. These new laws may also impact our innovation and business 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 force us to bear the burden of more onerous obligations in our contracts. Any perception of our practices, products or services as a violation of individual privacy rights may subject us to public 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 expose 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 complex. For example, European data transfers outside the European Economic Area are 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 European 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. If the mechanisms for transferring personal information from Europe to the United States should be found invalid or if other countries implement more restrictive regulations for cross-border data transfers (or not permit data to leave the country of origin), such developments could harm our business, financial condition and results of operations.

Security vulnerabilities in our products and systems could lead to reduced revenue 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 our data security systems and misused some 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,

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some of which may be specifically designed to attack our products, systems, computers or networks. Sophisticated hardware and operating system applications that we develop 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 or impair a customer’s ability to operate or use our products. The costs to prevent, eliminate, notify affected parties of, or alleviate cyber- 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. It is impossible to predict the extent, frequency or impact these problems may 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 our facilities in order to infiltrate our information 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, 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 liability or fines, our compliance with costly and time intensive notice requirements, governmental inquiry or 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 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 popular offerings with a large user base, and we expect them to continue to do so. Critical vulnerabilities may be identified in some 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 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 led to such claims), and could lead some customers 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 adopt 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 used 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 revenue or margins. Moreover, delayed sales, lower margins or lost customers resulting from disruptions caused by cyber-attacks or preventative measures could adversely affect our financial results, stock price and reputation.

We may not realize the anticipated benefits of past or future investments or acquisitions, and integration of acquisitions may disrupt our business and 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;

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• 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.

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Changes in tax rules and regulations, or interpretations thereof, may adversely affect our effective tax rates.

We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. The Tax Act, enacted into law on December 22, 2017, changes existing U.S. tax law applicable to us and includes adoption of a territorial tax system requiring us to incur a transition tax on previously untaxed earnings and profits of our foreign subsidiaries. A significant portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. As part of the adoption of a territorial tax system, the Tax Act also provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017 that were not subject to the one-time transition tax. In addition, certain international provisions introduced in the Tax Act will be effective for us in fiscal 2019. These provisions and changes that we may make to our corporate tax structure could adversely affect our tax rate and cash flow in future years.

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 tax on earnings from 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 taxation is determined in their jurisdictions that are contrary to the way in which we have interpreted and historically applied the rules and regulations described above in 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 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 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;

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• 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 third-party business partners have international operations and are also subject to these risks and if our third-party business partners are unable to appropriately manage these risks, our business may be harmed. If sales to any of our customers outside of the Americas are reduced, delayed or canceled because of any of the above factors, our revenue may decline.

We are subject to risks associated with compliance with laws and regulations globally, which may harm our business.

We are a global company subject to varied and complex laws, regulations and customs, both domestically and internationally. These laws and regulations relate to a number of aspects 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, 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 U.S. laws. 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, prohibitions on the conduct of our business, and damage to our reputation.

In addition, approximately 52% of our employees are located outside the United States. Accordingly, we are exposed to changes 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 payroll and other taxes, which likely would have a direct impact on our 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, more extended sales cycles, slower adoption of new technologies and increased price competition. Among our customers are government entities, including the U.S. federal government, and our revenue could decline if spending cuts impact the government’s ability to purchase our products and 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.

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A disruption in financial markets could impair our banking partners, on which we rely for operating cash management and affect our derivative counterparties. Any of these events would likely harm our business, financial condition, and results of 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.

Our intellectual property portfolio is a valuable asset and we may not be 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 U.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 U.S. In some foreign countries, the mechanisms to enforce intellectual property rights may be inadequate to protect our technology, which could harm our 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 defending against third parties alleging that we infringe their proprietary rights.

We have been, are currently, and may in the future be, subject to claims, negotiations and complex, protracted 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 of management and key personnel. We may not prevail in 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 effectively hedge our exposure.

Our operating results are subject to fluctuations in foreign currency exchange rates due to the global scope of our business. We attempt to mitigate a portion of these risks through foreign currency hedging based on our judgment of the appropriate trade-offs among risk, opportunity and expense. 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 the adverse financial impact resulting from unfavorable movement in foreign currency exchange rates, which could adversely affect our financial condition or results of operations.

Failure of our third-party customer service and technical support providers to adequately address customers’ requests could harm our business and adversely 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

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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 these third-party organizations are based overseas. If we encounter problems with our third-party customer service and technical support providers, our reputation may be harmed, our ability to sell our offerings could be adversely affected, and we could lose customers and associated revenue.

Failure to manage our sales and distribution channels 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. Nonetheless, if any single agreement with one of our distributors were terminated, any prolonged delay in securing a replacement distributor could have a negative 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 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.

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 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 or 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 unable to withstand adverse changes in economic conditions, which could result in insolvency, the inability of such distributors to obtain credit to finance purchases of our products and services, or a delay in paying their obligations to us.

We also sell some of our products and services through our direct sales force. Risks associated with this sales channel include more 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. 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 our expansion efforts do not generate a corresponding significant increase in revenue 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 provide products and services, directly and indirectly, to a variety of government entities, both domestically and internationally. Risks associated with licensing and selling products and services to government entities include more extended sales and collection cycles, varying governmental budgeting processes and adherence to complex procurement regulations and other government-specific contractual requirements. We 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 and financial results.

Revenue, margin or earnings shortfalls or the volatility of the market generally may cause the market price of our stock to decline.

In the past, the market price for our common stock experienced significant fluctuations and it may do so in the future. A number of factors may affect the market price for our common stock, such as:

• shortfalls in, or changes in expectations about our revenue, margins, earnings, Annualized Recurring Revenue (“ARR”), sales of our Adobe Experience Cloud offerings, 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;

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• the announcement of new products or services, product enhancements, service introductions, strategic alliances or significant agreements by us or our competitors;

• the loss of large customers 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, regulatory actions and other factors, including factors unrelated to our operating performance.

In addition, the market for technology stocks or the stock market in general may experience uneven investor confidence, which may cause 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.

If we are unable to recruit and retain key personnel, our business may be harmed.

Much of our future success depends on the continued service, availability and performance 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 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 information technology industry are in high demand and competition for their talents is intense in many areas where our employees are 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 unable to continue to successfully attract and retain key personnel, our business may be harmed.

We continue to hire personnel in countries where exceptional technical knowledge and other expertise are offered at lower costs, which increases 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 our 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, 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 revenue may not increase to offset these expected increases in costs and operating expenses, causing 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 find 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 recoverable. 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. Depending on the results of our review, 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.

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We have issued $1.9 billion of notes in debt offerings and may incur other debt in the future, which may adversely affect our financial condition and future financial results.

We have $1.9 billion in senior unsecured notes outstanding. We also have a $1 billion senior unsecured revolving credit 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 agreement 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.

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 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 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 loss 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 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. 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.

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 inherent 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 business, and added costs to resume operations.

Our investment portfolio may become impaired by deterioration of the financial markets.

Our cash equivalent and short-term investment portfolio as of June 1, 2018 consisted of corporate debt securities, foreign government securities and U.S. Treasury securities, money market mutual funds, municipal securities, time deposits and asset-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.

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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 June 1, 2018, 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, market liquidity or credit availability, and can provide no assurance that our investment portfolio will remain materially unimpaired.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Below is a summary of stock repurchases for the three months ended June 1, 2018. See Note 10 of our notes to condensed consolidated financial statements for information regarding our stock repurchase program.

Period	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 Plans
	(in thousands, except average price per share)
Beginning repurchase authority(1)					$	1,700,259
March 3, 2018—March 30, 2018
Shares repurchased	468	$	214.18	468	$	(100,259	)
March 31, 2018—April 27, 2018
Shares repurchased	1,153	$	221.76	1,153	$	(255,556	)	(2)
April 28, 2018—June 1, 2018
Shares repurchased	1,018	$	229.02	1,018	$	(233,204	)	(2)
Additional repurchase authority granted(3)					$	8,000,000
Total	2,639			2,639	$	9,111,240

^{_________________________________________} 

⁽¹⁾  In January 2017, the Board of Directors granted authority to repurchase up to $2.5 billion in common stock through the end of fiscal 2019.

⁽²⁾  In March 2018, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $700 million. As of June 1, 2018, approximately $211.2 million of the prepayment remained under this agreement.

⁽³⁾  In May 2018, the Board of Directors approved a new stock repurchase program granting us authority to repurchase up to $8 billion in common stock through the end of fiscal 2021. The new stock repurchase program is similar to our previous $2.5 billion program.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

None.

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ITEM 6.  EXHIBITS

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	9/2/16	3.2	000-15175
4.1	Specimen Common Stock Certificate	10-Q	6/25/14	4.1	000-15175
4.2	Form of Indenture dated as of January 25, 2010 by and between Adobe Systems Incorporated and Wells Fargo Bank, National Association, as trustee	S-3	2/26/16	4.1	333-209764
4.3	Forms of Global Note for Adobe Systems Incorporated’s 4.750% Notes due 2020, together with Form of Officer’s Certificate setting forth the terms of the Note	8-K	1/26/10	4.1	000-15175
4.4	Form of Global Note for Adobe Systems Incorporated’s 3.250% Notes due 2025, together with Form of Officer’s Certificate setting forth the terms of the Note	8-K	1/26/15	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
10.2	1997 Employee Stock Purchase Plan, as amended*	10-Q	6/29/16	10.3	000-15175
10.3A	2003 Equity Incentive Plan, as amended*	8-K	4/13/17	10.1	000-15175
10.3B	Form of Stock Option Agreement used in connection with the 2003 Equity Incentive Plan*	8-K	12/20/10	99.4	000-15175
10.3C	Form of RSU Grant Notice and Award Agreement pursuant to 2003 Equity Incentive Plan*	8-K	1/27/17	10.6	000-15175
10.3D	Form of RSU Grant Notice and Award Agreement pursuant to 2003 Equity Incentive Plan*	8-K	1/26/18	10.6	000-15175
10.3E	Form of Restricted Stock Agreement used in connection with the 2003 Equity Incentive Plan*	10-Q	10/7/04	10.11	000-15175
10.3F	2014 Performance Share Program pursuant to the 2003 Equity Incentive Plan*	8-K	1/29/14	10.2	000-15175

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		Incorporated by Reference**
Exhibit Number	Exhibit Description	Form	Filing Date	Exhibit Number	SEC File No.	Filed Herewith
10.3G	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
10.3H	2015 Performance Share Program pursuant to the 2003 Equity Incentive Plan*	8-K	1/28/15	10.2	000-15175
10.3I	Form of 2015 Performance Share Award Grant Notice and Award Agreement pursuant to the 2003 Equity Incentive Plan (applicable to the 2015 Performance Share Program)*	8-K	1/28/15	10.3	000-15175
10.3J	2016 Performance Share Program pursuant to the 2003 Equity Incentive Plan*	8-K	1/29/16	10.2	000-15175
10.3K	Form of 2016 Performance Share Award Grant Notice and Award Agreement pursuant to the 2003 Equity Incentive Plan (applicable to the 2016 Performance Share Program)*	8-K	1/29/16	10.3	000-15175
10.3L	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
10.3M	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
10.3N	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
10.3O	2017 Performance Share Program pursuant to the 2003 Equity Incentive Plan*	8-K	1/27/17	10.2	000-15175
10.3P	Form of 2017 Performance Share Award Grant Notice and Award Agreement pursuant to 2017 Performance Share Program and 2003 Equity Incentive Plan*	8-K	1/27/17	10.3	000-15175
10.3Q	2018 Performance Share Program pursuant to the 2003 Equity Incentive Plan*	8-K	1/26/18	10.2	000-15175
10.3R	Form of 2018 Performance Share Award Grant Notice and Award Agreement pursuant to 2017 Performance Share Program and 2003 Equity Incentive Plan*	8-K	1/26/18	10.3	000-15175
10.4A	2005 Equity Incentive Assumption Plan, as amended and restated*	10-Q	6/28/13	10.17	000-15175
10.4B	Form of Stock Option Agreement used in connection with the 2005 Equity Incentive Assumption Plan*	8-K	12/20/10	99.10	000-15175
10.4C	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

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		Incorporated by Reference**
Exhibit Number	Exhibit Description	Form	Filing Date	Exhibit Number	SEC File No.	Filed Herewith
10.5	Retention Agreement between Adobe Systems Incorporated and Shantanu Narayen, effective December 5, 2014	8-K	12/11/14	10.2	000-15175
10.6	Form of Indemnity Agreement*	10-Q	6/26/09	10.12	000-15175
10.7	Adobe Systems Incorporated Deferred Compensation Plan, as Amended and Restated*	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	Amendment to Credit Agreement, dated as of July 27, 2015, among Adobe Systems Incorporated and Bank of America, N.A. as Administrative Agent and Swing Line Lender and the Other Lenders Party Thereto	8-K	7/30/15	10.1	000-15175
10.9	Omniture, Inc. 2006 Equity Incentive Plan and related forms***	10-Q	8/6/09	10.3	000-52076
10.10	Omniture, Inc. 2008 Equity Incentive Plan and related forms***	10-K	2/27/09	10.10	000-52076
10.11	Demdex, Inc. 2008 Stock Plan, as amended*	S-8	1/27/11	99.1	333-171902
10.12	2014 Executive Annual Incentive Plan*	8-K	1/29/14	10.5	000-15175
10.13	2015 Executive Annual Incentive Plan*	8-K	1/28/15	10.5	000-15175
10.14	2016 Executive Annual Incentive Plan*	8-K	1/29/16	10.5	000-15175
10.15	2016 Executive Cash Performance Bonus Plan*	8-K	1/29/16	10.4	000-15175
10.16	2017 Executive Annual Incentive Plan*	8-K	1/27/17	10.5	000-15175
10.17	2018 Executive Annual Incentive Plan*	8-K	1/26/18	10.5	000-15175
10.18	EchoSign, Inc. 2005 Stock Plan, as amended*	S-8	7/29/11	99.1	333-175910
10.19	Auditude, Inc. 2009 Equity Incentive Plan, as amended*	S-8	11/18/11	99.1	333-178065
10.20	Auditude, Inc. Employee Stock Option Plan, as amended*	S-8	11/18/11	99.2	333-178065
10.21	Efficient Frontier, Inc. 2003 Stock Option/Stock Issuance Plan, as Amended and Restated*	S-8	1/27/12	99.1	333-179221

57

		Incorporated by Reference**
Exhibit Number	Exhibit Description	Form	Filing Date	Exhibit Number	SEC File No.	Filed Herewith
10.22A	Behance, Inc. 2012 Equity Incentive Plan*	S-8	1/23/13	99.1	333-186143
10.22B	Amendment No. 1 to the Behance, Inc. 2012 Equity Incentive Plan*	S-8	1/23/13	99.2	333-186143
10.23	Neolane 2008 Stock Option Plan*	S-8	8/27/13	99.1	333-190846
10.24	2012 Neolane Stock Option Plan for The United States*	S-8	8/27/13	99.2	333-190846
10.25	Description of 2016 Director Compensation*	10-K	1/19/16	10.32	000-15175
10.26	Description of 2017 Director Compensation*	10-K	1/20/17	10.32	000-15175
10.27	Description of 2018 Director Compensation*	10-K	1/22/18	10.29	000-15175
10.28A	Aviary, Inc. 2008 Stock Plan, as amended*	S-8	9/26/14	99.1	333-198973
10.28B	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
10.28C	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
10.31	Adobe Systems Incorporated 2017 Executive Severance Plan in the Event of a Change of Control*	8-K	12/14/17	10.1	000-15175
10.32	Picasso Acquisition Holding 1, Inc. 2012 Stock Option and Grant Plan*	S-8	3/13/15	99.1	333-202732
10.33	TubeMogul, Inc. 2007 Equity Compensation Plan, as amended, and forms of agreement thereunder††*	S-1	3/26/14	10.2	333-194817
10.34	TubeMogul, Inc. 2014 Equity Incentive Plan, and forms of agreement thereunder††*	S-1A	7/7/14	10.3	333-194817
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

58

		Incorporated by Reference**
Exhibit Number	Exhibit Description	Form	Filing Date	Exhibit Number	SEC File No.	Filed Herewith
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 10.9 through 10.11 are to filings made by Omniture, Inc.
†	The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q, 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-Q, 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.

59

SIGNATURE

Pursuant to the requirements 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/ JOHN MURPHY
	John Murphy
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial Officer)

Date: June 27, 2018

60

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-Q:

Adobe

Acrobat

Behance

Creative Cloud

LiveCycle

Reader

TubeMogul

All other trademarks are the property of their respective owners.

61

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Shantanu Narayen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Adobe Systems Incorporated;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: June 27, 2018	/s/ SHANTANU NARAYEN
	Shantanu Narayen
	President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, John Murphy, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Adobe Systems Incorporated;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: June 27, 2018	/s/ JOHN MURPHY
	John Murphy
	Executive Vice President and
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATIONS PURSUANT TO

RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934

AND 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Adobe Systems Incorporated (the “Registrant”) on Form 10-Q for the quarterly period ended June 1, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Shantanu Narayen, certify, in accordance with Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that to the best of my knowledge:

(1) The Report, to which this certification is attached as Exhibit 32.1, fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Dated: June 27, 2018	/s/ SHANTANU NARAYEN
	Shantanu Narayen
	President and Chief Executive Officer

A signed original of this written statement required by Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

EX-32.2

EXHIBIT 32.2

CERTIFICATIONS PURSUANT TO

RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934

AND 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Adobe Systems Incorporated (the “Registrant”) on Form 10-Q for the quarterly period ended June 1, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Murphy, certify, in accordance with Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that to the best of my knowledge:

(1) The Report, to which this certification is attached as Exhibit 32.2, fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Dated: June 27, 2018	/s/ JOHN MURPHY
	John Murphy
	Executive Vice President and
	Chief Financial Officer

A signed original of this written statement required by Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 01, 2018	Jun. 22, 2018
Document and Entity Information [Abstract]
Entity Registrant Name	ADOBE SYSTEMS INC
Entity Central Index Key	0000796343
Document Type	10-Q
Document Period End Date	Jun. 01, 2018
Amendment Flag	false
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--11-30
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		489,662,656

XML

Condensed Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Jun. 01, 2018	Dec. 01, 2017	[1]
Assets:
Cash and cash equivalents	$ 2,987,986	$ 2,306,072
Short-term investments	3,346,078	3,513,702
Trade receivables, net of allowances for doubtful accounts of $9,869 and $9,151, respectively	1,074,877	1,217,968
Prepaid expenses and other current assets	332,503	210,071
Total current assets	7,741,444	7,247,813
Property and equipment, net	993,486	936,976
Goodwill	5,823,792	5,821,561
Purchased and other intangibles, net	320,478	385,658
Deferred income taxes	117,970	0
Other assets	166,234	143,548
Total assets	15,163,404	14,535,556
Current liabilities:
Trade payables	117,194	113,538
Accrued expenses	1,030,367	993,773
Income taxes payable	37,933	14,196
Deferred revenue	2,543,462	2,405,950
Total current liabilities	3,728,956	3,527,457
Long-term liabilities:
Debt	1,874,057	1,881,421
Deferred revenue	90,805	88,592
Income taxes payable	611,509	173,088
Deferred income taxes	0	279,941
Other liabilities	152,494	125,188
Total liabilities	6,457,821	6,075,687
Stockholders' equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized, none issued	0	0
Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 490,435 and 491,262 shares outstanding, respectively	61	61
Additional paid-in-capital	5,354,175	5,082,195
Retained earnings	10,471,066	9,573,870
Accumulated other comprehensive income (loss)	(129,230)	(111,821)
Treasury stock, at cost (110,399 and 109,572 shares, respectively), net of reissuances	(6,990,489)	(6,084,436)
Total stockholders’ equity	8,705,583	8,459,869
Total liabilities and stockholders' equity	$ 15,163,404	$ 14,535,556

[1] The condensed consolidated balance sheet as of December 1, 2017 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.

XML

Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	Jun. 01, 2018	Dec. 01, 2017
Current assets:
Allowances for doubtful accounts	$ 9,869	$ 9,151
Stockholders' equity:
Preferred stock, par value	$ 0.0001	$ 0.0001
Preferred stock, shares authorized	2,000	2,000
Preferred stock, shares issued	0	0
Common stock, par value	$ 0.0001	$ 0.0001
Common stock, shares authorized	900,000	900,000
Common stock, shares issued	600,834	600,834
Common stock, shares outstanding	490,435	491,262
Treasury stock, shares	110,399	109,572

XML

Condensed Consolidated Statements of Income (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 01, 2018	Jun. 02, 2017	Jun. 01, 2018	Jun. 02, 2017
Revenue:
Subscription	$ 1,923,131	$ 1,483,690	$ 3,716,489	$ 2,867,546
Product	150,993	171,545	322,601	354,930
Services and support	121,236	116,955	235,217	231,360
Total revenue	2,195,360	1,772,190	4,274,307	3,453,836
Cost of revenue:
Subscription	186,355	142,734	351,040	283,915
Product	10,779	15,488	23,656	29,821
Services and support	84,210	81,138	165,550	162,961
Total cost of revenue	281,344	239,360	540,246	476,697
Gross profit	1,914,016	1,532,830	3,734,061	2,977,139
Operating expenses:
Research and development	374,128	299,401	722,897	584,478
Sales and marketing	646,215	553,098	1,227,172	1,073,395
General and administrative	178,040	156,929	348,480	307,737
Amortization of purchased intangibles	17,149	19,320	34,295	38,448
Total operating expenses	1,215,532	1,028,748	2,332,844	2,004,058
Operating income	698,484	504,082	1,401,217	973,081
Non-operating income (expense):
Interest and other income (expense), net	11,599	5,154	28,271	12,360
Interest expense	(20,363)	(18,347)	(40,262)	(36,477)
Investment gains (losses), net	1,079	1,729	4,075	4,286
Total non-operating income (expense), net	(7,685)	(11,464)	(7,916)	(19,831)
Income before income taxes	690,799	492,618	1,393,301	953,250
Provision for income taxes	27,632	118,228	147,058	180,414
Net income	$ 663,167	$ 374,390	$ 1,246,243	$ 772,836
Basic net income per share	$ 1.35	$ 0.76	$ 2.53	$ 1.56
Shares used to compute basic net income per share	491,914	494,371	491,993	494,492
Diluted net income per share	$ 1.33	$ 0.75	$ 2.50	$ 1.54
Shares used to compute diluted net income per share	498,252	500,351	499,166	501,032

XML

Condensed Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 01, 2018	Jun. 02, 2017	Jun. 01, 2018		Jun. 02, 2017
Statement of Comprehensive Income [Abstract]
Net income	$ 663,167	$ 374,390	$ 1,246,243		$ 772,836
Available-for-sale securities:
Unrealized gains / losses on available-for-sale securities	1,721	(8,665)	24,869		(9,690)
Reclassification adjustment for recognized gains / losses on available-for-sale securities	75	(246)	197	[1]	(406)
Net increase (decrease) from available-for-sale securities	(1,646)	8,419	(24,672)		9,284
Derivatives designated as hedging instruments:
Unrealized gains / losses on derivative instruments	31,104	(4,579)	29,767		2,130
Reclassification adjustment for recognized gains / losses on derivative instruments	(37)	(13,065)	(2,177)	[2]	(31,249)
Net increase (decrease) from derivatives designated as hedging instruments	31,067	(17,644)	27,590		(29,119)
Foreign currency translation adjustments	(48,713)	47,881	(20,327)		46,685
Other comprehensive income (loss), net of taxes	(19,292)	38,656	(17,409)		26,850
Total comprehensive income, net of taxes	$ 643,875	$ 413,046	$ 1,228,834		$ 799,686

[1] Reclassification adjustments for gains / losses on available-for-sale securities are classified in interest and other income (expense), net.

[2] Reclassification adjustments for gains / losses on derivative instruments are classified in revenue.

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 01, 2018		Jun. 02, 2017
Cash flows from operating activities:
Net income	$ 1,246,243		$ 772,836
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	152,882		162,444
Stock-based compensation	274,810		214,359
Deferred income taxes	(400,069)		52,275
Unrealized losses (gains) on investments, net	(1,502)		(2,600)
Other non-cash items	3,623		1,481
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Trade receivables, net	140,681		132,275
Prepaid expenses and other current assets	(106,612)		14,765
Trade payables	3,656		(80,819)
Accrued expenses	52,627		12,728
Income taxes payable	459,943		39,875
Deferred revenue	139,725		55,578
Net cash provided by operating activities	1,966,007		1,375,197
Cash flows from investing activities:
Purchases of short-term investments	(412,746)		(1,013,823)
Maturities of short-term investments	352,078		409,830
Proceeds from sales of short-term investments	200,458		743,234
Acquisitions, net of cash acquired	(14,614)		(459,626)
Purchases of property and equipment	(140,458)		(86,200)
Purchases of long-term investments and other assets	(13,698)		(20,608)
Proceeds from sale of long-term investments and other assets	2,897		764
Net cash used for investing activities	(26,083)		(426,429)
Cash flows from financing activities:
Purchases of treasury stock	(1,000,000)		(500,000)
Proceeds from reissuance of treasury stock	64,682		52,830
Taxes paid related to net share settlement of equity awards	(322,505)		(197,845)
Repayment of capital lease obligations	(815)		(912)
Net cash used for financing activities	(1,258,638)		(645,927)
Effect of foreign currency exchange rates on cash and cash equivalents	628		2,794
Net increase in cash and cash equivalents	681,914		305,635
Cash and cash equivalents at beginning of period	2,306,072	[1]	1,011,315
Cash and cash equivalents at end of period	2,987,986		1,316,950
Supplemental disclosures:
Cash paid for income taxes, net of refunds	73,508		48,670
Cash paid for interest	37,503		33,958
Non-cash investing activities:
Investment in Lease Receivable Applied to Building Purchase	0		80,439
Issuance of common stock and stock awards assumed in business acquisitions	$ 0		$ 10,348

[1] The condensed consolidated balance sheet as of December 1, 2017 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.

XML

Basis of Presentation and Summary of Significant Accounting Policies

6 Months Ended

Jun. 01, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation and Significant Accounting Policies

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 1, 2017 on file with the SEC (our “Annual Report”).

Recently Adopted Accounting Guidance

On January 26, 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2017-04, Simplifying the Test for Goodwill Impairment, which eliminated step two from the goodwill impairment test. In assessing impairment of goodwill, if it is concluded that it is more likely than not that the carrying amount of a reportable segment exceeds its fair value during the qualitative assessment, a one-step goodwill impairment test will be performed. If it is concluded during the quantitative test that the carrying amount of a reportable segment exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reportable segment. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted.

In the first quarter of 2018, we early adopted ASU 2017-04. The standard did not have an impact to our qualitative assessment for goodwill impairment that we performed in the second quarter of fiscal 2018.

Significant Accounting Policies

There have been no other material changes to our significant accounting policies during the six months ended June 1, 2018, as compared to the significant accounting policies described in our Annual Report.

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 GAAP when it becomes effective and permits the use of either the full retrospective or modified retrospective transition method. The updated standard is effective for us in the first quarter of fiscal 2019. We expect to adopt this updated standard in the first quarter of fiscal 2019 on a modified retrospective basis. We are currently evaluating the effect that the updated standard will have on our condensed consolidated financial statements and related disclosures.

While we are continuing to assess all potential impacts of the new standard, we believe there should not be a material change to the amount of consolidated revenues on an annual basis.

We expect revenue related to our 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.

We believe 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 vendor-specific objective evidence (“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 and potential classification as “product” instead of “subscription” revenue on the income statement. We offer on-premise term-based software licenses bundled with maintenance and support as a deployment model for certain offerings within our Digital Experience, Digital Media, and Publishing business units. We do not expect these arrangements to have a material impact to revenue reported in annual reporting periods subsequent to adoption, however they may result in a material balance sheet impact on the date of adoption due to the application of the modified retrospective transition method. This method requires that we account for all contracts or only those contracts that are not completed contracts at the date of initial adoption, using the modified retrospective approach and not restating prior financial periods. We will record a cumulative effect of initially applying the provisions of the new standard as an adjustment to increase the opening retained earnings balance and reduce the opening deferred revenue balance.

Other expected impacts to our policies and disclosures include: earlier recognition of revenue for certain contracts due to the elimination of contingent revenue limitations, the requirement to estimate variable consideration for certain arrangements, increased allocation of revenue to and from professional services and other offerings, and changes to our financial statement disclosures such as remaining performance obligations.

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. There may be a material balance sheet impact at the period of adoption to capitalize costs of obtaining the contract as an asset, with a corresponding adjustment to opening retained earnings at the date of initial adoption. Additionally, we may have to record related deferred income taxes. We continue to evaluate the magnitude of the impact and the period over which these capitalized costs will be amortized.

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 condensed 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 risk 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 condensed consolidated financial statements and related disclosures.

With the exception of the new standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 1, 2018, as compared to the recent accounting pronouncements described in our Annual Report, that are of significance or potential significance to us.

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Acquisitions

6 Months Ended

Jun. 01, 2018

Business Combinations [Abstract]

ACQUISITIONS

ACQUISITIONS

On December 19, 2016, we completed our acquisition of TubeMogul, a publicly held video advertising platform company. Under the acquisition method of accounting, the total purchase price was allocated to TubeMogul’s net tangible and intangible assets based upon their estimated fair values as of December 19, 2016. The total final purchase price for TubeMogul was $560.8 million of which $348.4 million, was allocated to goodwill that was non-deductible for tax purposes, $113.1 million to identifiable intangible assets and $99.3 million to net assets acquired.

Proforma financial information has not been presented for this acquisition as the impact to our condensed consolidated financial statements was not material.

Subsequent to June 1, 2018, we completed our acquisition of Magento Commerce (“Magento”), a privately-held commerce platform company, for approximately $1.68 billion in cash consideration, as well as the assumption of certain employee equity awards. The initial purchase accounting for this transaction has not yet been completed given the short period of time between the acquisition date and the issuance of these financial statements. Magento will be integrated into our Digital Experience reportable segment for financial reporting purposes in the third quarter of fiscal 2018.

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Cash, Cash Equivalents and Short-Term Investments

6 Months Ended

Jun. 01, 2018

Cash, Cash Equivalents, and Short-term Investments [Abstract]

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

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, which is reflected as a separate component of stockholders’ equity in our condensed consolidated balance sheets. Gains and losses are recognized when realized in our condensed 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.

Cash, cash equivalents and short-term investments consisted of the following as of June 1, 2018 (in thousands):

	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Current assets:
Cash	$	345,475	$	—	$	—		$	345,475
Cash equivalents:
Corporate bonds and commercial paper	21,294		3		(1		)	21,296
Money market mutual funds	2,590,037		—		—			2,590,037
Time deposits	31,178		—		—			31,178
Total cash equivalents	2,642,509		3		(1		)	2,642,511
Total cash and cash equivalents	2,987,984		3		(1		)	2,987,986
Short-term fixed income securities:
Asset-backed securities	84,710		—		(823		)	83,887
Corporate debt securities	2,451,735		647		(32,110		)	2,420,272
Foreign government securities	3,852		—		(65		)	3,787
Municipal securities	19,236		—		(303		)	18,933
U.S. Treasury securities	822,735		—		(3,536		)	819,199
Total short-term investments	3,382,268		647		(36,837		)	3,346,078
Total cash, cash equivalents and short-term investments	$	6,370,252	$	650	$	(36,838	)	$	6,334,064

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 debt securities	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

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 June 1, 2018 and December 1, 2017 (in thousands):

	2018					2017
	Fair  Value		Gross Unrealized Losses			Fair  Value		Gross Unrealized Losses
Corporate debt securities	$	1,806,212	$	(25,141	)	$	1,338,232	$	(5,459	)
Asset-backed securities	50,375		(525		)	64,618		(193		)
Municipal securities	17,987		(279		)	11,805		(115		)
Foreign government securities	3,787		(65		)	2,388		(8		)
U.S. Treasury securities	516,896		(2,231		)	593,296		(2,087		)
Total	$	2,395,257	$	(28,241	)	$	2,010,339	$	(7,862	)

There were 1,210 securities and 894 securities in an unrealized loss position for less than twelve months at June 1, 2018 and at December 1, 2017, respectively.

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 June 1, 2018 and December 1, 2017 (in thousands):

	2018					2017
	Fair  Value		Gross Unrealized Losses			Fair  Value		Gross Unrealized Losses
Corporate debt securities	$	461,358	$	(6,970	)	$	500,689	$	(4,666	)
Asset-backed securities	33,512		(298		)	32,383		(210		)
Municipal securities	945		(24		)	598		(17		)
U.S. Treasury securities	302,303		(1,305		)	338,950		(1,465		)
Total	$	798,118	$	(8,597	)	$	872,620	$	(6,358	)

There were 331 securities and 360 securities in an unrealized loss position for more than twelve months at June 1, 2018 and at December 1, 2017, 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 June 1, 2018 (in thousands):

	Amortized Cost		Estimated Fair Value
Due within one year	$	1,602,117	$	1,594,991
Due between one and two years	799,230		789,530
Due between two and three years	762,818		748,883
Due after three years	218,103		212,674
Total	$	3,382,268	$	3,346,078

We review our debt 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. The portion of the write-down related to credit loss would be recorded to interest and other income, net in our condensed consolidated statements of income. Any portion not related to credit loss would be recorded to accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our condensed consolidated balance sheets. During the six months ended June 1, 2018 and June 2, 2017, we did not consider any of our investments to be other-than-temporarily impaired.

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Fair Value Measurements

6 Months Ended

Jun. 01, 2018

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

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 six months ended June 1, 2018.

The fair value of our financial assets and liabilities at June 1, 2018 was determined using the following inputs (in thousands):

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents:
Corporate bonds and commercial paper	$	21,296	$	—	$	21,296	$	—
Money market mutual funds	2,590,037		2,590,037		—		—
Time deposits	31,178		31,178		—		—
Short-term investments:
Asset-backed securities	83,887		—		83,887		—
Corporate debt securities	2,420,272		—		2,420,272		—
Foreign government securities	3,787		—		3,787		—
Municipal securities	18,933		—		18,933		—
U.S. Treasury securities	819,199		—		819,199		—
Prepaid expenses and other current assets:
Foreign currency derivatives	40,081		—		40,081		—
Other assets:
Deferred compensation plan assets	67,487		3,376		64,111		—
Total assets	$	6,096,157	$	2,624,591	$	3,471,566	$	—

Liabilities:
Accrued expenses:
Foreign currency derivatives	$	1,280	$	—	$	1,280	$	—
Other Liabilities:
Interest rate swap derivatives	10,076		—		10,076		—
Total liabilities	$	11,356	$	—	$	11,356	$	—

The fair value of our financial assets and liabilities at December 1, 2017 was determined using the following inputs (in thousands): 

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents:
Money market mutual funds	$	2,006,741	$	2,006,741	$	—	$	—
Time deposits	18,843		18,843		—		—
Short-term investments:
Asset-backed securities	98,001		—		98,001		—
Corporate debt securities	2,454,260		—		2,454,260		—
Foreign government securities	2,388		—		2,388		—
Municipal securities	21,065		—		21,065		—
U.S. Treasury securities	937,988		—		937,988		—
Prepaid expenses and other current assets:
Foreign currency derivatives	14,198		—		14,198		—
Other assets:
Deferred compensation plan assets	56,690		2,573		54,117		—
Total assets	$	5,610,174	$	2,028,157	$	3,582,017	$	—

Liabilities:
Accrued expenses:
Foreign currency derivatives	$	1,598	$	—	$	1,598	$	—
Other liabilities:
Interest rate swap derivatives	1,058		—		1,058		—
Total liabilities	$	2,656	$	—	$	2,656	$	—

Our fixed income available-for-sale debt securities consist of high quality, investment grade securities from diverse issuers with a weighted average credit rating of AA-. We value these securities based on pricing from independent pricing vendors who 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 or inputs other than quoted prices that are observable either directly or indirectly in determining fair value, 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 Level 2. We perform routine procedures such as comparing prices obtained from multiple independent sources to ensure that appropriate fair values are recorded.

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 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 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. For the three and six months ended June 1, 2018 and June 2, 2017, we determined there were no other-than-temporary impairments of our cost and equity method investments.

The fair value of our senior notes was $1.91 billion as of June 1, 2018, based on observable market prices in less active markets and categorized as Level 2. See Note 13 for further details regarding our debt.

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Derivatives and Hedging Activities

6 Months Ended

Jun. 01, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVES AND HEDGING ACTIVITIES

 DERIVATIVES AND HEDGING ACTIVITIES

Hedge Accounting and Hedging Programs

We recognize derivative instruments and hedging activities as either assets or liabilities in our condensed 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.

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 condensed 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 condensed 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—Hedges 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 condensed 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.

Cash Flow Hedging—Hedges of Forecasted Foreign Currency Revenue and Interest Rate Risk

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 condensed 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 condensed 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 condensed consolidated statements of income.

Fair Value Hedging - Hedges of Interest Rate Risk

In fiscal 2014, we entered into interest rate swaps designated as fair value hedges related to our $900 million of 4.75% fixed interest rate senior notes due February 1, 2020. In effect, the interest rate swaps convert the fixed interest rate on these senior notes to a floating interest rate based on LIBOR. Under the terms of the swaps, we will pay monthly interest at the one-month LIBOR interest 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 13 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 condensed consolidated statements of income. The fair value of the interest rate swaps is reflected in other liabilities or other assets in our condensed consolidated balance sheets.

The fair value of derivative instruments on our condensed consolidated balance sheets as of June 1, 2018 and December 1, 2017 were as follows (in thousands):

	2018				2017
	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) (2)	$	38,918	$	—	$	12,918	$	—
Interest rate swap (3)	—		10,076		—		1,058
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts (1)	1,163		1,280		1,280		1,598
Total derivatives	$	40,081	$	11,356	$	14,198	$	2,656

^{_________________________________________} 

⁽¹⁾  Included in prepaid expenses and other current assets and accrued expenses for asset derivatives and liability derivatives, respectively, on our condensed consolidated balance sheets.

⁽²⁾  Hedging effectiveness expected to be recognized into income within the next twelve months.

⁽³⁾  Included in other liabilities on our condensed 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 condensed consolidated statements of income for the three and six months ended June 1, 2018 was as follows (in thousands):

	Three Months					Six Months
	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)	$	31,104		$	—	$	29,767		$	—
Net gain (loss) reclassified from accumulated OCI into income, net of tax(2)	$	337		$	—	$	1,359		$	—
Net gain (loss) recognized in income(3)	$	(12,084	)	$	—	$	(22,410	)	$	—
Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income(4)	$	—		$	2,784	$	—		$	(877	)

The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our condensed consolidated statements of income for the three and six months ended June 2, 2017 was as follows (in thousands):

	Three Months					Six Months
	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)	$	(4,579	)	$	—	$	2,130		$	—
Net gain (loss) reclassified from accumulated OCI into income, net of tax(2)	$	13,315		$	—	$	31,624		$	—
Net gain (loss) recognized in income(3)	$	(9,615	)	$	—	$	(15,652	)	$	—
Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income(4)	$	—		$	2,448	$	—		$	3,536

^{_________________________________________} 

⁽¹⁾  Net change in the fair value of the effective portion classified in 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.

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Goodwill and Purchased and Other Intangibles

6 Months Ended

Jun. 01, 2018

Goodwill and Intangible Assets Disclosure [Abstract]

GOODWILL AND PURCHASED AND OTHER INTANGIBLES

GOODWILL AND PURCHASED AND OTHER INTANGIBLES

Goodwill as of June 1, 2018 and December 1, 2017 was $5.82 billion for both periods. During the six months ended June 1, 2018, decreases due to foreign currency translation adjustments were offset by the increase from an immaterial acquisition. During the second quarter of fiscal 2018, we completed our annual goodwill impairment test associated with our reporting units and determined there was no impairment of goodwill.

Purchased and other intangible assets subject to amortization as of June 1, 2018 and December 1, 2017 were as follows (in thousands): 

	2018							2017
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Purchased technology	$	184,025	$	(88,062	)	$	95,963	$	223,252	$	(110,433	)	$	112,819
Customer contracts and relationships	$	546,138	$	(363,256	)	$	182,882	$	577,484	$	(356,613	)	$	220,871
Trademarks	35,255		(17,399		)	17,856		76,255		(56,094		)	20,161
Acquired rights to use technology	61,916		(48,354		)	13,562		71,130		(54,223		)	16,907
Localization	645		(503		)	142		603		(170		)	433
Other intangibles	36,980		(26,907		)	10,073		38,693		(24,226		)	14,467
Total other intangible assets	$	680,934	$	(456,419	)	$	224,515	$	764,165	$	(491,326	)	$	272,839
Purchased and other intangible assets, net	$	864,959	$	(544,481	)	$	320,478	$	987,417	$	(601,759	)	$	385,658

Amortization expense related to purchased and other intangible assets was $34.6 million and $68.5 million for the three and six months ended June 1, 2018, respectively. Comparatively, amortization expense related to purchased and other intangible assets was $39.1 million and $77.2 million for the three and six months ended June 2, 2017, respectively. Of these amounts, $17.4 million and $34.0 million were included in cost of sales for the three and six months ended June 1, 2018, respectively, and $19.5 million and $38.2 million the three and six months ended June 2, 2017, respectively.

During the six months ended June 1, 2018, certain purchased intangibles associated with our acquisitions of Omniture, Inc. and Day Software Holding AG became fully amortized and were removed from the condensed consolidated balance sheets.

As of June 1, 2018, we expect amortization expense in future periods to be as follows (in thousands):

Fiscal Year	Purchased Technology		Other Intangible Assets
Remainder of 2018	$	18,729	$	48,720
2019	34,173		70,402
2020	31,880		39,866
2021	9,391		17,218
2022	1,622		14,151
Thereafter	168		34,158
Total expected amortization expense	$	95,963	$	224,515

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Accrued Expenses

6 Months Ended

Jun. 01, 2018

Payables and Accruals [Abstract]

ACCRUED EXPENSES

ACCRUED EXPENSES

Accrued expenses as of June 1, 2018 and December 1, 2017 consisted of the following (in thousands):

	2018		2017
Accrued compensation and benefits	$	432,871	$	417,742
Accrued media costs	113,314		134,525
Sales and marketing allowances	37,621		47,389
Accrued corporate marketing	76,412		72,087
Taxes payable	46,350		49,550
Royalties payable	42,052		46,411
Accrued interest expense	25,596		25,594
Other	256,151		200,475
Accrued expenses	$	1,030,367	$	993,773

Accrued media costs primarily relate to our advertising platform offerings 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 local and regional expenses. Other is also comprised of deferred rent related to office locations with rent escalations and foreign currency liability derivatives.

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Income Taxes

6 Months Ended

Jun. 01, 2018

Income Tax Disclosure [Abstract]

Income Taxes

 INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law, which significantly changes existing U.S. tax law and includes many provisions applicable to us, such as reducing the U.S. federal statutory tax rate, imposing a one-time transition tax on deemed repatriation of deferred foreign income, and adopting a territorial tax system. The Tax Act reduced the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. For fiscal 2018, our blended U.S. federal statutory tax rate is 22.2%. This is the result of using the tax rate of 35% for the first month of fiscal 2018 and the reduced tax rate of 21% for the remaining eleven months of fiscal 2018. The Tax Act also required us to incur a one-time transition tax on deferred foreign income not previously subject to U.S. income tax at a rate of 15.5% for foreign cash and certain other net current assets, and 8% on the remaining income, in each case reduced by certain foreign tax credits. The Tax Act also includes a provision to tax global intangible low-taxed income of foreign subsidiaries, a special tax deduction for foreign-derived intangible income, and a base erosion anti-abuse tax measure that may tax certain payments between a U.S. corporation and its subsidiaries. These additional provisions of the Tax Act will be effective for us beginning December 1, 2018.

The Tax Act was effective in the first quarter of our fiscal 2018. As of June 1, 2018, we have not completed our accounting for the tax effects of the Tax Act. During the quarter, we recorded an adjustment to the provisional tax charge based on reasonable estimates for those tax effects using the current available information and technical guidance on the interpretations of the Tax Act. In order to complete our accounting for the impact of the Tax Act, we continue to obtain, analyze and interpret additional guidance as such guidance becomes available from the U.S. Treasury Department, the Internal Revenue Service (“IRS”), state taxing jurisdictions, the FASB, and other standard-setting and regulatory bodies. New guidance or interpretations may materially impact our provision for income taxes in future periods. Additional information that is needed to complete the analysis but is currently unavailable includes, but is not limited to, the amount of earnings of certain subsidiaries as well as the amount of foreign taxes paid on such earnings for our fiscal 2018, the final determination of certain net deferred tax assets subject to remeasurement and when the related temporary differences will be settled or realized, and the tax treatment of such provisions of the Tax Act by various state tax authorities. In addition, we do not currently have sufficient information and guidance to determine the impact of certain changes to the taxation of our foreign earnings that will become effective for us in fiscal 2019. The provisional accounting impacts may change in future reporting periods until our accounting analysis is finalized, which will occur no later than one year from the enactment date, as permitted by SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act.

As a result of the reduction in the federal corporate tax rate, we remeasured our deferred taxes as of the date of enactment of the Tax Act and recorded a provisional tax charge of $10 million based on the tax rate that is expected to apply when such deferred taxes are settled or realized in future periods. We have not completed our accounting for the measurement of deferred taxes. To calculate the remeasurement of deferred taxes, we estimated when the existing deferred taxes will be settled or realized. The remeasurement of deferred taxes included in our financial statements will be subject to further revisions if our current estimates are different from our actual future operating results.

As part of the adoption of a new territorial tax system we recorded a provisional transition tax expense of $118 million on deferred foreign earnings, which was comprised of $86 million for fiscal 2018 plus other ancillary effects recorded in the first fiscal quarter, long-term income taxes payable of $533 million, and a reduction in our deferred tax liability of $415 million. As a result of a change to our corporate tax structure that provided us the ability to deduct more expenses against our earnings in the U.S., we updated our Tax Act calculation during the three months ended June 1, 2018. This included an additional provisional transition tax expense of $28 million on deferred foreign earnings, a decrease of deferred tax assets by $72 million which also included utilization of credits that we estimate will be available to reduce the transition tax, and a reduction of long-term income tax payable by $44 million. To calculate the transition tax, we estimated our deferred foreign income for fiscal 2017 and 2018 because these tax returns are not complete or due. The fiscal 2017 and fiscal 2018 taxable income will be known once the respective tax returns are completed and filed. In addition, U.S. and foreign audit settlements may significantly impact the estimated transition tax. The impact of the U.S. and foreign audits on the transition tax will be known as the audits are concluded. We intend to elect to pay the federal transition tax over a period of eight years as permitted by the Tax Act. As a result, we reclassified $39 million from long-term income taxes payable to short-term income taxes payable for the first installment payment due in fiscal 2019.

Certain international provisions introduced in the Tax Act will be effective for us in fiscal 2019. We need additional information to complete our analysis on whether to adopt an accounting policy to account for the tax effects of these provisions in the period that it is subject to such tax, or to provide deferred taxes for book and tax basis differences that upon reversal may be subject to these taxes. Accordingly, we have not recorded any tax with respect to these provisions in the six months ended June 1, 2018. We will make an accounting policy election and complete the required accounting no later than the first quarter of fiscal 2019.

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Stock-Based Compensation

6 Months Ended

Jun. 01, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

Summary of Restricted Stock Units

Restricted stock unit activity for the six months ended June 1, 2018 and the fiscal year ended December 1, 2017 was as follows (in thousands):

	2018		2017
Beginning outstanding balance	9,304		8,316
Awarded	3,324		5,018
Released	(3,206	)	(3,859	)
Forfeited	(376	)	(766	)
Increase due to acquisition	—		595
Ending outstanding balance	9,046		9,304

Information regarding restricted stock units outstanding at June 1, 2018 and June 2, 2017 is summarized below:

	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value(*) (millions)
2018
Restricted stock units outstanding	9,046	1.36	$	2,273.3
Restricted stock units vested and expected to vest	8,224	1.30	$	2,066.9
2017
Restricted stock units outstanding	9,655	1.42	$	1,385.4
Restricted stock units vested and expected to vest	8,741	1.36	$	1,254.2

^{_________________________________________} 

^(*)  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 June 1, 2018 and June 2, 2017 were $251.31 and $143.48, respectively. 

Summary of Performance Shares

Our 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 of our Board of Directors approves the terms of each of our Performance Share Programs, including the award calculation methodology, under the terms of our 2003 Equity Incentive Plan. Shares may be earned based on the achievement of an objective relative total stockholder return measured over a three-year performance period. Performance share awards will be awarded and fully vest upon the Executive Compensation Committee's certification of the level of achievement following the three-year anniversary of each grant date. Program participants generally have the ability to receive up to 200% of the target number of shares originally granted.

In the first quarter of fiscal 2018, the Executive Compensation Committee approved the 2018 Performance Share Program.

In the first quarter of fiscal 2018, the Executive Compensation Committee also certified the actual performance achievement of participants in the 2015 Performance Share Program. Actual performance resulted in participants achieving 200% of target or approximately 1.0 million shares. The shares granted and achieved under the 2015 Performance Share Program fully vested on the three-year anniversary of the grant on January 24, 2018, if not forfeited.

In the first quarter of fiscal 2017, the Executive Compensation Committee certified the actual performance achievement of participants in the 2014 Performance Share Program. Actual performance resulted in participants achieving 198% of target or approximately 1.1 million shares. The shares granted and achieved under the 2014 Performance Share Program fully vested on the three-year anniversary of the grant on January 24, 2017, if not forfeited.

As of June 1, 2018, the shares awarded under our 2018, 2017 and 2016 Performance Share Programs are yet to be achieved.

The following table sets forth the summary of performance share activity under our Performance Share Programs for the six months ended June 1, 2018 and the fiscal year ended December 1, 2017 (in thousands): 

	2018					2017
	Shares Granted			Maximum Shares Eligible to Receive		Shares Granted			Maximum Shares Eligible to Receive
Beginning outstanding balance	1,534			3,068		1,630			3,261
Awarded	837		(1)	628		1,082		(2)	1,040
Achieved	(1,050	)		(1,054	)	(1,135	)		(1,147	)
Forfeited	(120	)		(240	)	(43	)		(86	)
Ending outstanding balance	1,201			2,402		1,534			3,068

^{_________________________________________} 

⁽¹⁾  Included in the 0.8 million shares awarded during the six months ended June 1, 2018 were 0.5 million shares awarded for the final achievement of the 2015 Performance Share program. The remaining awarded shares were for the 2018 Performance Share Program.

⁽²⁾  Included in the 1.1 million shares awarded during the fiscal year ended December 1, 2017 were 0.6 million shares awarded for the final achievement of the 2014 Performance Share program. The remaining awarded shares were for the 2017 Performance Share Program.

Summary of Employee Stock Purchase Plan Shares

There were no stock purchases under the Employee Stock Purchase Plan (“ESPP”) during the three months ended June 1, 2018 and June 2, 2017. The expected life of the ESPP shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights during the six months ended June 1, 2018 and June 2, 2017 were as follows:

	2018	2017
Expected life (in years)	0.5 - 2.0	0.5 - 2.0
Volatility	26% - 27%	22% - 25%
Risk free interest rate	1.54% - 1.89%	0.62% - 1.2%

Employees purchased 0.7 million shares at an average price of $91.74 and 0.7 million shares at an average price of $71.71 for the six months ended June 1, 2018 and June 2, 2017, respectively. The intrinsic value of shares purchased during the six months ended June 1, 2018 and June 2, 2017 was $54.3 million and $20.4 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.

Summary of Stock Options

The Executive Compensation Committee of Adobe’s Board of Directors eliminated the use of stock option grants for all employees and the Board of Directors effective fiscal 2012 and fiscal 2014, respectively. As of June 1, 2018 and December 1, 2017, we had 0.1 million and 0.3 million stock options outstanding, respectively.

Compensation Costs

As of June 1, 2018, there was $1.10 billion 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 2.1 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

Total stock-based compensation costs included in our condensed consolidated statements of income for the three months ended June 1, 2018 and June 2, 2017 were as follows (in thousands):

	2018				2017
Income Statement Classifications	Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards
Cost of revenue—subscription	$	729	$	4,526	$	878	$	4,673
Cost of revenue—services and support	1,647		2,680		1,501		1,677
Research and development	5,301		63,608		4,435		42,539
Sales and marketing	5,443		42,747		4,801		35,439
General and administrative	1,350		17,346		1,262		19,615
Total	$	14,470	$	130,907	$	12,877	$	103,943

Total stock-based compensation costs included in our condensed consolidated statements of income for the six months ended June 1, 2018 and June 2, 2017 were as follows (in thousands):

	2018				2017
Income Statement Classifications	Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards
Cost of revenue—subscription	$	1,497	$	8,470	$	1,271	$	6,834
Cost of revenue—services and support	3,663		5,666		3,224		4,742
Research and development	10,649		117,681		8,467		75,633
Sales and marketing	10,763		81,595		9,189		67,904
General and administrative	2,830		38,088		2,492		37,931
Total	$	29,402	$	251,500	$	24,643	$	193,044

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Stockholders' Equity

6 Months Ended

Jun. 01, 2018

Stockholders' Equity Note [Abstract]

STOCKHOLDERS' EQUITY

STOCKHOLDERS’ EQUITY

Retained Earnings

The changes in retained earnings for the six months ended June 1, 2018 were as follows (in thousands): 

Balance as of December 1, 2017	$	9,573,870
Net income	1,246,243
Reissuance of treasury stock	(348,729		)
Adjustments to equity as a result of the Tax Act	(318		)
Balance as of June 1, 2018	$	10,471,066

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 condensed 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 treasury stock 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 reduction of retained earnings in our condensed consolidated balance sheets.

The components of accumulated other comprehensive income (loss) and activity, net of related taxes, as of June 1, 2018 were as follows (in thousands):

	December 1, 2017			Increase / Decrease			Reclassification Adjustments				June 1, 2018
Net unrealized gains / losses on available-for-sale securities:
Unrealized gains on available-for-sale securities	$	2,704		$	(1,865	)	$	(189	)		$	650
Unrealized losses on available-for-sale securities	(14,220		)	(23,004		)	386				(36,838		)
Total net unrealized gains / losses on available-for-sale securities	(11,516		)	(24,869		)	197			(1)	(36,188		)
Net unrealized gains / losses on derivative instruments designated as hedging instruments	(3,367		)	29,767			(2,177		)	(2)	24,223
Cumulative foreign currency translation adjustments	(96,938		)	(20,327		)	—				(117,265		)
Total accumulated other comprehensive income (loss), net of taxes	$	(111,821	)	$	(15,429	)	$	(1,980	)		$	(129,230	)

^{_________________________________________} 

⁽¹⁾  Reclassification adjustments for gains / losses on available-for-sale securities are classified in interest and other income (expense), net.

⁽²⁾  Reclassification adjustments for gains / losses on derivative instruments are classified in revenue.

The following table sets forth the taxes related to each component of other comprehensive income for the three and six months ended June 1, 2018 and June 2, 2017 (in thousands):

	Three Months						Six Months
	2018			2017			2018			2017
Available-for-sale securities:
Unrealized gains / losses	$	—		$	40		$	—		$	288
Reclassification adjustments	—			—			—			(110		)
Subtotal available-for-sale securities	—			40			—			178
Derivatives designated as hedging instruments:
Reclassification adjustments on derivative instruments	(100		)	(149		)	(1,626		)	(433		)
Foreign currency translation adjustments	—			1,261			(1,742		)	1,647
Total taxes, other comprehensive income	$	(100	)	$	1,152		$	(3,368	)	$	1,392

Stock Repurchase Program

To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we may repurchase shares in the open market or enter into structured repurchase agreements with third parties. In January 2017, our Board of Directors approved our current stock repurchase program granting us authority to repurchase up to $2.5 billion in common stock through the end of fiscal 2019. In May 2018, our Board of Directors granted us another authority to repurchase up to $8 billion in common stock through the end of fiscal 2021.

During the six months ended June 1, 2018 and June 2, 2017, we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling $1 billion and $500 million, respectively. We enter into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.

The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval and the average VWAP of our stock during the interval less the agreed upon discount. During the six months ended June 1, 2018, we repurchased approximately 4.3 million shares at an average price of $208.69 through structured repurchase agreements entered into during fiscal 2017 and the six months ended June 1, 2018. During the six months ended June 2, 2017 we repurchased approximately 4.3 million shares at an average price of $118.00 through structured repurchase agreements entered into during fiscal 2016 and the six months ended June 2, 2017.

For the six months ended June 1, 2018, the prepayments were classified as treasury stock on our condensed consolidated balance sheets at the payment date, though only shares physically delivered to us by June 1, 2018 were excluded from the computation of earnings per share. As of June 1, 2018, $211.2 million of prepayment remained under this agreement.

Subsequent to June 1, 2018, as part of the $2.5 billion stock repurchase authority approved in January 2017, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $750 million. This amount will be classified as treasury stock on our condensed consolidated balance sheets. Upon completion of the $750 million stock repurchase agreement, $150 million remains under the $2.5 billion authority. We have not drawn from our new $8 billion authority as of the issuance of these financial statements.

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Net Income Per Share

6 Months Ended

Jun. 01, 2018

Earnings Per Share [Abstract]

NET INCOME PER SHARE

 NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income per share for the three and six months ended June 1, 2018 and June 2, 2017 (in thousands, except per share data):

	Three Months				Six Months
	2018		2017		2018		2017
Net income	$	663,167	$	374,390	$	1,246,243	$	772,836
Shares used to compute basic net income per share	491,914		494,371		491,993		494,492
Dilutive potential common shares:
Unvested restricted stock units and performance share awards	6,212		5,637		7,019		6,175
Stock options	126		343		154		365
Shares used to compute diluted net income per share	498,252		500,351		499,166		501,032
Basic net income per share	$	1.35	$	0.76	$	2.53	$	1.56
Diluted net income per share	$	1.33	$	0.75	$	2.50	$	1.54

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Commitments and Contingencies

6 Months Ended

Jun. 01, 2018

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

 COMMITMENTS AND CONTINGENCIES

Royalties

We have royalty commitments associated with the licensing of certain offerings. Royalty expense is generally based on a dollar amount per unit sold or a percentage of the underlying revenue.

Indemnifications

In the 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 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.

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 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 to intellectual property disputes, 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 in 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-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.

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Debt

6 Months Ended

Jun. 01, 2018

Debt Disclosure [Abstract]

DEBT

DEBT

Notes

In February 2010, we issued $900 million of 4.75% senior notes due February 1, 2020 (the “2020 Notes”). Our proceeds were $900 million and were net of an issuance discount of $5.5 million. In addition, we incurred issuance costs of $6.4 million. Both the discount and issuance costs are being amortized to interest expense over the term of the 2020 Notes using the effective interest method. The effective interest rate including the discount and issuance costs is 4.92%. Interest is payable semi-annually, in arrears, on February 1 and August 1, and commenced on August 1, 2010.

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 interest rate swaps effectively convert the fixed interest rate on our 2020 Notes to a floating interest rate based on LIBOR. Under the terms of the swap, we will pay monthly interest at the one-month LIBOR interest rate plus 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.

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 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.

As of June 1, 2018, our outstanding notes payable consist of the 2020 Notes and 2025 Notes (the “Notes”) with a total carrying value of $1.87 billion which includes the fair value of the interest rate swap and is net of debt issuance costs. Based on quoted prices in inactive markets, the total fair value of the Notes was $1.91 billion as of June 1, 2018 and excludes the effect of the fair value hedge of the 2020 Notes for which we entered into interest rate swaps as described above.

The Notes rank equally with our other unsecured and unsubordinated indebtedness. We may redeem the Notes at any time, subject to a make-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 June 1, 2018, we were in compliance with all of the covenants.

In February 2018, we made semi-annual interest payments on our 2020 and 2025 Notes totaling $37.6 million.

Credit Agreement

On March 2, 2012, we entered into a five-year $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 million in commitments, for a maximum aggregate commitment of $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% 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 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. 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 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 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 June 1, 2018, there were no outstanding borrowings under this Credit Agreement and we were in compliance with all covenants.

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Non-Operating Income (Expense)

6 Months Ended

Jun. 01, 2018

Other Income and Expenses [Abstract]

NON-OPERATING INCOME (EXPENSE)

 NON-OPERATING INCOME (EXPENSE)

Non-operating income (expense) for the three and six months ended June 1, 2018 and June 2, 2017 included the following (in thousands):

	Three Months						Six Months
	2018			2017			2018			2017
Interest and other income (expense), net:
Interest income	$	25,771		$	15,216		$	48,401		$	29,373
Foreign exchange gains (losses)	(14,222		)	(10,349		)	(20,111		)	(17,480		)
Realized gains on fixed income investment	6			356			190			650
Realized losses on fixed income investment	(81		)	(110		)	(386		)	(244		)
Other	125			41			177			61
Interest and other income (expense), net	$	11,599		$	5,154		$	28,271		$	12,360
Interest expense	$	(20,363	)	$	(18,347	)	$	(40,262	)	$	(36,477	)
Investment gains (losses), net:
Realized investment gains	$	503		$	431		$	4,497		$	2,390
Unrealized investment gains	576			1,298			—			1,896
Unrealized investment losses	—			—			(422		)	—
Investment gains (losses), net	$	1,079		$	1,729		$	4,075		$	4,286
Non-operating income (expense), net	$	(7,685	)	$	(11,464	)	$	(7,916	)	$	(19,831	)

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Segments

6 Months Ended

Jun. 01, 2018

Segment Reporting [Abstract]

SEGMENTS

SEGMENTS

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.

Effective in fiscal 2018, our business organized into three reportable segments: Digital Media, Digital Experience (formerly Digital Marketing), and Publishing (formerly Print and Publishing). These segments provide our senior management with a comprehensive financial view of our key businesses. Our segments are aligned around our two strategic growth opportunities described above, placing our Publishing business in a third segment that contains some of our mature products and solutions.

Additionally, in the first quarter of fiscal 2018, we moved our legacy enterprise offerings—Adobe Connect web conferencing platform and Adobe LiveCycle, an enterprise document and forms platform—from our Digital Experience segment into Publishing, in order to more closely align our Digital Experience business with the strategic growth opportunity. Prior year information in the tables below have been reclassified to reflect this change.

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 Experience—Our Digital Experience 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.

• Publishing—Our 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. It also includes our web conferencing and document and forms platforms effective the first quarter of fiscal 2018.

Our segment results for the three months ended June 1, 2018 and June 2, 2017 were as follows (dollars in thousands):

	Digital Media			Digital Experience			Publishing			Total
Three months ended June 1, 2018
Revenue	$	1,546,424		$	585,952		$	62,984		$	2,195,360
Cost of revenue	54,760			220,696			5,888			281,344
Gross profit	$	1,491,664		$	365,256		$	57,096		$	1,914,016
Gross profit as a percentage of revenue	96		%	62		%	91		%	87		%
Three months ended June 2, 2017
Revenue	$	1,211,988		$	495,415		$	64,787		$	1,772,190
Cost of revenue	58,350			175,164			5,846			239,360
Gross profit	$	1,153,638		$	320,251		$	58,941		$	1,532,830
Gross profit as a percentage of revenue	95		%	65		%	91		%	86		%

Our segment results for the six months ended June 1, 2018 and June 2, 2017 were as follows (dollars in thousands):

	Digital Media			Digital Experience			Publishing			Total
Six months ended June 1, 2018
Revenue	$	3,006,985		$	1,140,059		$	127,263		$	4,274,307
Cost of revenue	110,229			419,488			10,529			540,246
Gross profit	$	2,896,756		$	720,571		$	116,734		$	3,734,061
Gross profit as a percentage of revenue	96		%	63		%	92		%	87		%
Six months ended June 2, 2017
Revenue	$	2,350,067		$	972,687		$	131,082		$	3,453,836
Cost of revenue	113,402			351,927			11,368			476,697
Gross profit	$	2,236,665		$	620,760		$	119,714		$	2,977,139
Gross profit as a percentage of revenue	95		%	64		%	91		%	86		%

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Basis of Presentation and Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 01, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

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 1, 2017 on file with the SEC (our “Annual Report”).

Recent Accounting Pronouncements

Recently Adopted Accounting Guidance

On January 26, 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2017-04, Simplifying the Test for Goodwill Impairment, which eliminated step two from the goodwill impairment test. In assessing impairment of goodwill, if it is concluded that it is more likely than not that the carrying amount of a reportable segment exceeds its fair value during the qualitative assessment, a one-step goodwill impairment test will be performed. If it is concluded during the quantitative test that the carrying amount of a reportable segment exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reportable segment. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted.

In the first quarter of 2018, we early adopted ASU 2017-04. The standard did not have an impact to our qualitative assessment for goodwill impairment that we performed in the second quarter of fiscal 2018.

Significant Accounting Policies

There have been no other material changes to our significant accounting policies during the six months ended June 1, 2018, as compared to the significant accounting policies described in our Annual Report.

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 GAAP when it becomes effective and permits the use of either the full retrospective or modified retrospective transition method. The updated standard is effective for us in the first quarter of fiscal 2019. We expect to adopt this updated standard in the first quarter of fiscal 2019 on a modified retrospective basis. We are currently evaluating the effect that the updated standard will have on our condensed consolidated financial statements and related disclosures.

While we are continuing to assess all potential impacts of the new standard, we believe there should not be a material change to the amount of consolidated revenues on an annual basis.

We expect revenue related to our 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.

We believe 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 vendor-specific objective evidence (“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 and potential classification as “product” instead of “subscription” revenue on the income statement. We offer on-premise term-based software licenses bundled with maintenance and support as a deployment model for certain offerings within our Digital Experience, Digital Media, and Publishing business units. We do not expect these arrangements to have a material impact to revenue reported in annual reporting periods subsequent to adoption, however they may result in a material balance sheet impact on the date of adoption due to the application of the modified retrospective transition method. This method requires that we account for all contracts or only those contracts that are not completed contracts at the date of initial adoption, using the modified retrospective approach and not restating prior financial periods. We will record a cumulative effect of initially applying the provisions of the new standard as an adjustment to increase the opening retained earnings balance and reduce the opening deferred revenue balance.

Other expected impacts to our policies and disclosures include: earlier recognition of revenue for certain contracts due to the elimination of contingent revenue limitations, the requirement to estimate variable consideration for certain arrangements, increased allocation of revenue to and from professional services and other offerings, and changes to our financial statement disclosures such as remaining performance obligations.

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. There may be a material balance sheet impact at the period of adoption to capitalize costs of obtaining the contract as an asset, with a corresponding adjustment to opening retained earnings at the date of initial adoption. Additionally, we may have to record related deferred income taxes. We continue to evaluate the magnitude of the impact and the period over which these capitalized costs will be amortized.

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 condensed 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 risk 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 condensed consolidated financial statements and related disclosures.

With the exception of the new standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 1, 2018, as compared to the recent accounting pronouncements described in our Annual Report, that are of significance or potential significance to us.

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Derivatives and Hedging Activities Derivatives Policy (Policies)

6 Months Ended

Jun. 01, 2018

Accounting Policies [Abstract]

Derivatives, Policy

Hedge Accounting and Hedging Programs

We recognize derivative instruments and hedging activities as either assets or liabilities in our condensed 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.

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 condensed 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 condensed 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—Hedges 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 condensed 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.

Cash Flow Hedging—Hedges of Forecasted Foreign Currency Revenue and Interest Rate Risk

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 condensed 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 condensed 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 condensed consolidated statements of income.

Fair Value Hedging - Hedges of Interest Rate Risk

In fiscal 2014, we entered into interest rate swaps designated as fair value hedges related to our $900 million of 4.75% fixed interest rate senior notes due February 1, 2020. In effect, the interest rate swaps convert the fixed interest rate on these senior notes to a floating interest rate based on LIBOR. Under the terms of the swaps, we will pay monthly interest at the one-month LIBOR interest 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 13 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 condensed consolidated statements of income. The fair value of the interest rate swaps is reflected in other liabilities or other assets in our condensed consolidated balance sheets.

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Cash, Cash Equivalents and Short-Term Investments (Tables)

6 Months Ended

Jun. 01, 2018

Cash, Cash Equivalents, and Short-term Investments [Abstract]

Cash Cash Equivalents and Short term Investments

Cash, cash equivalents and short-term investments consisted of the following as of June 1, 2018 (in thousands):

	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Current assets:
Cash	$	345,475	$	—	$	—		$	345,475
Cash equivalents:
Corporate bonds and commercial paper	21,294		3		(1		)	21,296
Money market mutual funds	2,590,037		—		—			2,590,037
Time deposits	31,178		—		—			31,178
Total cash equivalents	2,642,509		3		(1		)	2,642,511
Total cash and cash equivalents	2,987,984		3		(1		)	2,987,986
Short-term fixed income securities:
Asset-backed securities	84,710		—		(823		)	83,887
Corporate debt securities	2,451,735		647		(32,110		)	2,420,272
Foreign government securities	3,852		—		(65		)	3,787
Municipal securities	19,236		—		(303		)	18,933
U.S. Treasury securities	822,735		—		(3,536		)	819,199
Total short-term investments	3,382,268		647		(36,837		)	3,346,078
Total cash, cash equivalents and short-term investments	$	6,370,252	$	650	$	(36,838	)	$	6,334,064

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 debt securities	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

Continuous Unrealized Loss Position Less Than Twelve Months Related to Available-for-Sale Securities

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 June 1, 2018 and December 1, 2017 (in thousands):

	2018					2017
	Fair  Value		Gross Unrealized Losses			Fair  Value		Gross Unrealized Losses
Corporate debt securities	$	1,806,212	$	(25,141	)	$	1,338,232	$	(5,459	)
Asset-backed securities	50,375		(525		)	64,618		(193		)
Municipal securities	17,987		(279		)	11,805		(115		)
Foreign government securities	3,787		(65		)	2,388		(8		)
U.S. Treasury securities	516,896		(2,231		)	593,296		(2,087		)
Total	$	2,395,257	$	(28,241	)	$	2,010,339	$	(7,862	)

Continuous Unrealized Loss Position Twelve Months or Longer Related to Available-for-Sale-Securities

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 June 1, 2018 and December 1, 2017 (in thousands):

	2018					2017
	Fair  Value		Gross Unrealized Losses			Fair  Value		Gross Unrealized Losses
Corporate debt securities	$	461,358	$	(6,970	)	$	500,689	$	(4,666	)
Asset-backed securities	33,512		(298		)	32,383		(210		)
Municipal securities	945		(24		)	598		(17		)
U.S. Treasury securities	302,303		(1,305		)	338,950		(1,465		)
Total	$	798,118	$	(8,597	)	$	872,620	$	(6,358	)

Cost and Estimated Fair Value of Debt Securities

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 June 1, 2018 (in thousands):

	Amortized Cost		Estimated Fair Value
Due within one year	$	1,602,117	$	1,594,991
Due between one and two years	799,230		789,530
Due between two and three years	762,818		748,883
Due after three years	218,103		212,674
Total	$	3,382,268	$	3,346,078

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Fair Value Measurements (Tables)

6 Months Ended

Jun. 01, 2018

Fair Value Disclosures [Abstract]

Financial assets and liabilities at fair value on a recurring basis

The fair value of our financial assets and liabilities at June 1, 2018 was determined using the following inputs (in thousands):

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents:
Corporate bonds and commercial paper	$	21,296	$	—	$	21,296	$	—
Money market mutual funds	2,590,037		2,590,037		—		—
Time deposits	31,178		31,178		—		—
Short-term investments:
Asset-backed securities	83,887		—		83,887		—
Corporate debt securities	2,420,272		—		2,420,272		—
Foreign government securities	3,787		—		3,787		—
Municipal securities	18,933		—		18,933		—
U.S. Treasury securities	819,199		—		819,199		—
Prepaid expenses and other current assets:
Foreign currency derivatives	40,081		—		40,081		—
Other assets:
Deferred compensation plan assets	67,487		3,376		64,111		—
Total assets	$	6,096,157	$	2,624,591	$	3,471,566	$	—

Liabilities:
Accrued expenses:
Foreign currency derivatives	$	1,280	$	—	$	1,280	$	—
Other Liabilities:
Interest rate swap derivatives	10,076		—		10,076		—
Total liabilities	$	11,356	$	—	$	11,356	$	—

The fair value of our financial assets and liabilities at December 1, 2017 was determined using the following inputs (in thousands): 

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents:
Money market mutual funds	$	2,006,741	$	2,006,741	$	—	$	—
Time deposits	18,843		18,843		—		—
Short-term investments:
Asset-backed securities	98,001		—		98,001		—
Corporate debt securities	2,454,260		—		2,454,260		—
Foreign government securities	2,388		—		2,388		—
Municipal securities	21,065		—		21,065		—
U.S. Treasury securities	937,988		—		937,988		—
Prepaid expenses and other current assets:
Foreign currency derivatives	14,198		—		14,198		—
Other assets:
Deferred compensation plan assets	56,690		2,573		54,117		—
Total assets	$	5,610,174	$	2,028,157	$	3,582,017	$	—

Liabilities:
Accrued expenses:
Foreign currency derivatives	$	1,598	$	—	$	1,598	$	—
Other liabilities:
Interest rate swap derivatives	1,058		—		1,058		—
Total liabilities	$	2,656	$	—	$	2,656	$	—

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Derivatives and Hedging Activities (Tables)

6 Months Ended

Jun. 01, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Fair Value of Derivative Instruments

The fair value of derivative instruments on our condensed consolidated balance sheets as of June 1, 2018 and December 1, 2017 were as follows (in thousands):

	2018				2017
	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) (2)	$	38,918	$	—	$	12,918	$	—
Interest rate swap (3)	—		10,076		—		1,058
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts (1)	1,163		1,280		1,280		1,598
Total derivatives	$	40,081	$	11,356	$	14,198	$	2,656

^{_________________________________________} 

⁽¹⁾  Included in prepaid expenses and other current assets and accrued expenses for asset derivatives and liability derivatives, respectively, on our condensed consolidated balance sheets.

⁽²⁾  Hedging effectiveness expected to be recognized into income within the next twelve months.

⁽³⁾  Included in other liabilities on our condensed consolidated balance sheets.

Effect of Derivative Instruments as Designated Cash Flow Hedges and Not Designated as Hedges

The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our condensed consolidated statements of income for the three and six months ended June 1, 2018 was as follows (in thousands):

	Three Months					Six Months
	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)	$	31,104		$	—	$	29,767		$	—
Net gain (loss) reclassified from accumulated OCI into income, net of tax(2)	$	337		$	—	$	1,359		$	—
Net gain (loss) recognized in income(3)	$	(12,084	)	$	—	$	(22,410	)	$	—
Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income(4)	$	—		$	2,784	$	—		$	(877	)

The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our condensed consolidated statements of income for the three and six months ended June 2, 2017 was as follows (in thousands):

	Three Months					Six Months
	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)	$	(4,579	)	$	—	$	2,130		$	—
Net gain (loss) reclassified from accumulated OCI into income, net of tax(2)	$	13,315		$	—	$	31,624		$	—
Net gain (loss) recognized in income(3)	$	(9,615	)	$	—	$	(15,652	)	$	—
Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income(4)	$	—		$	2,448	$	—		$	3,536

^{_________________________________________} 

⁽¹⁾  Net change in the fair value of the effective portion classified in 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.

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Goodwill and Purchased and Other Intangibles (Tables)

6 Months Ended

Jun. 01, 2018

Goodwill and Intangible Assets Disclosure [Abstract]

Purchased and other intangible assets

Purchased and other intangible assets subject to amortization as of June 1, 2018 and December 1, 2017 were as follows (in thousands): 

	2018							2017
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Purchased technology	$	184,025	$	(88,062	)	$	95,963	$	223,252	$	(110,433	)	$	112,819
Customer contracts and relationships	$	546,138	$	(363,256	)	$	182,882	$	577,484	$	(356,613	)	$	220,871
Trademarks	35,255		(17,399		)	17,856		76,255		(56,094		)	20,161
Acquired rights to use technology	61,916		(48,354		)	13,562		71,130		(54,223		)	16,907
Localization	645		(503		)	142		603		(170		)	433
Other intangibles	36,980		(26,907		)	10,073		38,693		(24,226		)	14,467
Total other intangible assets	$	680,934	$	(456,419	)	$	224,515	$	764,165	$	(491,326	)	$	272,839
Purchased and other intangible assets, net	$	864,959	$	(544,481	)	$	320,478	$	987,417	$	(601,759	)	$	385,658

Amortization expense in future periods

As of June 1, 2018, we expect amortization expense in future periods to be as follows (in thousands):

Fiscal Year	Purchased Technology		Other Intangible Assets
Remainder of 2018	$	18,729	$	48,720
2019	34,173		70,402
2020	31,880		39,866
2021	9,391		17,218
2022	1,622		14,151
Thereafter	168		34,158
Total expected amortization expense	$	95,963	$	224,515

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Accrued Expenses (Tables)

6 Months Ended

Jun. 01, 2018

Payables and Accruals [Abstract]

Accrued Expenses

Accrued expenses as of June 1, 2018 and December 1, 2017 consisted of the following (in thousands):

	2018		2017
Accrued compensation and benefits	$	432,871	$	417,742
Accrued media costs	113,314		134,525
Sales and marketing allowances	37,621		47,389
Accrued corporate marketing	76,412		72,087
Taxes payable	46,350		49,550
Royalties payable	42,052		46,411
Accrued interest expense	25,596		25,594
Other	256,151		200,475
Accrued expenses	$	1,030,367	$	993,773

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Stock-Based Compensation (Tables)

6 Months Ended

Jun. 01, 2018

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Restricted Stock Unit Activity

Restricted stock unit activity for the six months ended June 1, 2018 and the fiscal year ended December 1, 2017 was as follows (in thousands):

	2018		2017
Beginning outstanding balance	9,304		8,316
Awarded	3,324		5,018
Released	(3,206	)	(3,859	)
Forfeited	(376	)	(766	)
Increase due to acquisition	—		595
Ending outstanding balance	9,046		9,304

Restricted Stock Units Outstanding

Information regarding restricted stock units outstanding at June 1, 2018 and June 2, 2017 is summarized below:

	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value(*) (millions)
2018
Restricted stock units outstanding	9,046	1.36	$	2,273.3
Restricted stock units vested and expected to vest	8,224	1.30	$	2,066.9
2017
Restricted stock units outstanding	9,655	1.42	$	1,385.4
Restricted stock units vested and expected to vest	8,741	1.36	$	1,254.2

^{_________________________________________} 

^(*)  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 June 1, 2018 and June 2, 2017 were $251.31 and $143.48, respectively. 

Performance Share Activity

The following table sets forth the summary of performance share activity under our Performance Share Programs for the six months ended June 1, 2018 and the fiscal year ended December 1, 2017 (in thousands): 

	2018					2017
	Shares Granted			Maximum Shares Eligible to Receive		Shares Granted			Maximum Shares Eligible to Receive
Beginning outstanding balance	1,534			3,068		1,630			3,261
Awarded	837		(1)	628		1,082		(2)	1,040
Achieved	(1,050	)		(1,054	)	(1,135	)		(1,147	)
Forfeited	(120	)		(240	)	(43	)		(86	)
Ending outstanding balance	1,201			2,402		1,534			3,068

^{_________________________________________} 

⁽¹⁾  Included in the 0.8 million shares awarded during the six months ended June 1, 2018 were 0.5 million shares awarded for the final achievement of the 2015 Performance Share program. The remaining awarded shares were for the 2018 Performance Share Program.

⁽²⁾  Included in the 1.1 million shares awarded during the fiscal year ended December 1, 2017 were 0.6 million shares awarded for the final achievement of the 2014 Performance Share program. The remaining awarded shares were for the 2017 Performance Share Program.

Schedule of Share-based Payment Award, Employee Stock Purchase Plan, Valuation Assumptions

There were no stock purchases under the Employee Stock Purchase Plan (“ESPP”) during the three months ended June 1, 2018 and June 2, 2017. The expected life of the ESPP shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights during the six months ended June 1, 2018 and June 2, 2017 were as follows:

	2018	2017
Expected life (in years)	0.5 - 2.0	0.5 - 2.0
Volatility	26% - 27%	22% - 25%
Risk free interest rate	1.54% - 1.89%	0.62% - 1.2%

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs

Total stock-based compensation costs included in our condensed consolidated statements of income for the three months ended June 1, 2018 and June 2, 2017 were as follows (in thousands):

	2018				2017
Income Statement Classifications	Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards
Cost of revenue—subscription	$	729	$	4,526	$	878	$	4,673
Cost of revenue—services and support	1,647		2,680		1,501		1,677
Research and development	5,301		63,608		4,435		42,539
Sales and marketing	5,443		42,747		4,801		35,439
General and administrative	1,350		17,346		1,262		19,615
Total	$	14,470	$	130,907	$	12,877	$	103,943

Total stock-based compensation costs included in our condensed consolidated statements of income for the six months ended June 1, 2018 and June 2, 2017 were as follows (in thousands):

	2018				2017
Income Statement Classifications	Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards
Cost of revenue—subscription	$	1,497	$	8,470	$	1,271	$	6,834
Cost of revenue—services and support	3,663		5,666		3,224		4,742
Research and development	10,649		117,681		8,467		75,633
Sales and marketing	10,763		81,595		9,189		67,904
General and administrative	2,830		38,088		2,492		37,931
Total	$	29,402	$	251,500	$	24,643	$	193,044

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Stockholders' Equity (Tables)

6 Months Ended

Jun. 01, 2018

Stockholders' Equity Note [Abstract]

Retained Earnings

The changes in retained earnings for the six months ended June 1, 2018 were as follows (in thousands): 

Balance as of December 1, 2017	$	9,573,870
Net income	1,246,243
Reissuance of treasury stock	(348,729		)
Adjustments to equity as a result of the Tax Act	(318		)
Balance as of June 1, 2018	$	10,471,066

Schedule of Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) and activity, net of related taxes, as of June 1, 2018 were as follows (in thousands):

	December 1, 2017			Increase / Decrease			Reclassification Adjustments				June 1, 2018
Net unrealized gains / losses on available-for-sale securities:
Unrealized gains on available-for-sale securities	$	2,704		$	(1,865	)	$	(189	)		$	650
Unrealized losses on available-for-sale securities	(14,220		)	(23,004		)	386				(36,838		)
Total net unrealized gains / losses on available-for-sale securities	(11,516		)	(24,869		)	197			(1)	(36,188		)
Net unrealized gains / losses on derivative instruments designated as hedging instruments	(3,367		)	29,767			(2,177		)	(2)	24,223
Cumulative foreign currency translation adjustments	(96,938		)	(20,327		)	—				(117,265		)
Total accumulated other comprehensive income (loss), net of taxes	$	(111,821	)	$	(15,429	)	$	(1,980	)		$	(129,230	)

^{_________________________________________} 

⁽¹⁾  Reclassification adjustments for gains / losses on available-for-sale securities are classified in interest and other income (expense), net.

⁽²⁾  Reclassification adjustments for gains / losses on derivative instruments are classified in revenue.

Other Comprehensive Income, Tax

The following table sets forth the taxes related to each component of other comprehensive income for the three and six months ended June 1, 2018 and June 2, 2017 (in thousands):

	Three Months						Six Months
	2018			2017			2018			2017
Available-for-sale securities:
Unrealized gains / losses	$	—		$	40		$	—		$	288
Reclassification adjustments	—			—			—			(110		)
Subtotal available-for-sale securities	—			40			—			178
Derivatives designated as hedging instruments:
Reclassification adjustments on derivative instruments	(100		)	(149		)	(1,626		)	(433		)
Foreign currency translation adjustments	—			1,261			(1,742		)	1,647
Total taxes, other comprehensive income	$	(100	)	$	1,152		$	(3,368	)	$	1,392

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Net Income Per Share (Tables)

6 Months Ended

Jun. 01, 2018

Earnings Per Share [Abstract]

Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share for the three and six months ended June 1, 2018 and June 2, 2017 (in thousands, except per share data):

	Three Months				Six Months
	2018		2017		2018		2017
Net income	$	663,167	$	374,390	$	1,246,243	$	772,836
Shares used to compute basic net income per share	491,914		494,371		491,993		494,492
Dilutive potential common shares:
Unvested restricted stock units and performance share awards	6,212		5,637		7,019		6,175
Stock options	126		343		154		365
Shares used to compute diluted net income per share	498,252		500,351		499,166		501,032
Basic net income per share	$	1.35	$	0.76	$	2.53	$	1.56
Diluted net income per share	$	1.33	$	0.75	$	2.50	$	1.54

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Non-Operating Income (Expense) (Tables)

6 Months Ended

Jun. 01, 2018

Other Income and Expenses [Abstract]

Non-Operating Income (Expense)

Non-operating income (expense) for the three and six months ended June 1, 2018 and June 2, 2017 included the following (in thousands):

	Three Months						Six Months
	2018			2017			2018			2017
Interest and other income (expense), net:
Interest income	$	25,771		$	15,216		$	48,401		$	29,373
Foreign exchange gains (losses)	(14,222		)	(10,349		)	(20,111		)	(17,480		)
Realized gains on fixed income investment	6			356			190			650
Realized losses on fixed income investment	(81		)	(110		)	(386		)	(244		)
Other	125			41			177			61
Interest and other income (expense), net	$	11,599		$	5,154		$	28,271		$	12,360
Interest expense	$	(20,363	)	$	(18,347	)	$	(40,262	)	$	(36,477	)
Investment gains (losses), net:
Realized investment gains	$	503		$	431		$	4,497		$	2,390
Unrealized investment gains	576			1,298			—			1,896
Unrealized investment losses	—			—			(422		)	—
Investment gains (losses), net	$	1,079		$	1,729		$	4,075		$	4,286
Non-operating income (expense), net	$	(7,685	)	$	(11,464	)	$	(7,916	)	$	(19,831	)

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Segments (Tables)

6 Months Ended

Jun. 01, 2018

Segment Reporting [Abstract]

Segment Reporting

Our segment results for the three months ended June 1, 2018 and June 2, 2017 were as follows (dollars in thousands):

	Digital Media			Digital Experience			Publishing			Total
Three months ended June 1, 2018
Revenue	$	1,546,424		$	585,952		$	62,984		$	2,195,360
Cost of revenue	54,760			220,696			5,888			281,344
Gross profit	$	1,491,664		$	365,256		$	57,096		$	1,914,016
Gross profit as a percentage of revenue	96		%	62		%	91		%	87		%
Three months ended June 2, 2017
Revenue	$	1,211,988		$	495,415		$	64,787		$	1,772,190
Cost of revenue	58,350			175,164			5,846			239,360
Gross profit	$	1,153,638		$	320,251		$	58,941		$	1,532,830
Gross profit as a percentage of revenue	95		%	65		%	91		%	86		%

Our segment results for the six months ended June 1, 2018 and June 2, 2017 were as follows (dollars in thousands):

	Digital Media			Digital Experience			Publishing			Total
Six months ended June 1, 2018
Revenue	$	3,006,985		$	1,140,059		$	127,263		$	4,274,307
Cost of revenue	110,229			419,488			10,529			540,246
Gross profit	$	2,896,756		$	720,571		$	116,734		$	3,734,061
Gross profit as a percentage of revenue	96		%	63		%	92		%	87		%
Six months ended June 2, 2017
Revenue	$	2,350,067		$	972,687		$	131,082		$	3,453,836
Cost of revenue	113,402			351,927			11,368			476,697
Gross profit	$	2,236,665		$	620,760		$	119,714		$	2,977,139
Gross profit as a percentage of revenue	95		%	64		%	91		%	86		%

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Acquisitions (Details) - USD ($) $ in Millions	1 Months Ended
	Jun. 27, 2018	Dec. 19, 2016
TubeMogul
Business Acquisition
Business Combination Purchase Price		$ 560.8
Purchase price allocation, goodwill		348.4
Purchase price allocation, identifiable intangible assets		113.1
Purchase price allocation, net assets acquired		$ 99.3
Subsequent Event | Magento
Business Acquisition
Payments to Acquire Businesses, Gross	$ 1,680.0

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Cash, Cash Equivalents and Short-Term Investments (Details) - USD ($) $ in Thousands	Jun. 01, 2018	Dec. 01, 2017
Schedule of Available-for-sale Securities
Amortized Cost	$ 6,370,252	$ 5,831,289
Unrealized Gains	650	2,705
Unrealized Losses	(36,838)	(14,220)
Estimated Fair Value, Total cash, cash equivalents and short-term investments	6,334,064	5,819,774
Cash and cash equivalents
Schedule of Available-for-sale Securities
Amortized Cost	2,987,984	2,306,072
Unrealized Gains	3	0
Unrealized Losses	(1)	0
Cash and Cash Equivalents, Fair Value Disclosure	2,987,986	2,306,072
Cash
Schedule of Available-for-sale Securities
Amortized Cost	345,475	280,488
Unrealized Gains	0	0
Unrealized Losses	0	0
Cash and Cash Equivalents, Fair Value Disclosure	345,475	280,488
Cash equivalents
Schedule of Available-for-sale Securities
Amortized Cost	2,642,509	2,025,584
Unrealized Gains	3	0
Unrealized Losses	(1)	0
Cash and Cash Equivalents, Fair Value Disclosure	2,642,511	2,025,584
Cash equivalents | Corporate Bonds And Commercial Paper
Schedule of Available-for-sale Securities
Amortized Cost	21,294
Unrealized Gains	3
Unrealized Losses	(1)
Cash and Cash Equivalents, Fair Value Disclosure	21,296
Cash equivalents | Money Market Mutual Funds
Schedule of Available-for-sale Securities
Amortized Cost	2,590,037	2,006,741
Unrealized Gains	0	0
Unrealized Losses	0	0
Cash and Cash Equivalents, Fair Value Disclosure	2,590,037	2,006,741
Cash equivalents | Time deposits
Schedule of Available-for-sale Securities
Amortized Cost	31,178	18,843
Unrealized Gains	0	0
Unrealized Losses	0	0
Cash and Cash Equivalents, Fair Value Disclosure	31,178	18,843
Short-term fixed income securities
Schedule of Available-for-sale Securities
Amortized Cost	3,382,268	3,525,217
Unrealized Gains	647	2,705
Unrealized Losses	(36,837)	(14,220)
Estimated Fair Value, short-term investments	3,346,078	3,513,702
Short-term fixed income securities | Asset-backed Securities
Schedule of Available-for-sale Securities
Amortized Cost	84,710	98,403
Unrealized Gains	0	1
Unrealized Losses	(823)	(403)
Estimated Fair Value, short-term investments	83,887	98,001
Short-term fixed income securities | Corporate Debt Securities
Schedule of Available-for-sale Securities
Amortized Cost	2,451,735	2,461,691
Unrealized Gains	647	2,694
Unrealized Losses	(32,110)	(10,125)
Estimated Fair Value, short-term investments	2,420,272	2,454,260
Short-term fixed income securities | Foreign Government Securities
Schedule of Available-for-sale Securities
Amortized Cost	3,852	2,396
Unrealized Gains	0	0
Unrealized Losses	(65)	(8)
Estimated Fair Value, short-term investments	3,787	2,388
Short-term fixed income securities | Municipal Securities
Schedule of Available-for-sale Securities
Amortized Cost	19,236	21,189
Unrealized Gains	0	8
Unrealized Losses	(303)	(132)
Estimated Fair Value, short-term investments	18,933	21,065
Short-term fixed income securities | U.S. Treasury Securities
Schedule of Available-for-sale Securities
Amortized Cost	822,735	941,538
Unrealized Gains	0	2
Unrealized Losses	(3,536)	(3,552)
Estimated Fair Value, short-term investments	$ 819,199	$ 937,988

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Cash, Cash Equivalents and Short-Term Investments (Details 1) $ in Thousands	Jun. 01, 2018 USD ($) securities	Dec. 01, 2017 USD ($) securities
Schedule of Available-for-sale Securities
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	$ 2,395,257	$ 2,010,339
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Accumulated Loss	(28,241)	(7,862)
Available-for-sale securities in a continuous unrealized loss position for more than twelve months, fair value	798,118	872,620
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Accumulated Loss	(8,597)	(6,358)
Fair Value and Gross Unrealized Losses Related to Available-For-Sale Securities
Available-for-sale Securities, Amortized Cost Basis	$ 6,370,252	$ 5,831,289
Available-for-sale, Securities in Unrealized Loss Positions, Qualitative Disclosure, Number of Positions, Less than One Year | securities	1,210	894
Available-for-sale, Securities in Unrealized Loss Positions, Qualitative Disclosure, Number of Positions, Greater than or Equal to One Year | securities	331	360
Asset-backed Securities
Schedule of Available-for-sale Securities
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	$ 50,375	$ 64,618
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Accumulated Loss	(525)	(193)
Available-for-sale securities in a continuous unrealized loss position for more than twelve months, fair value	33,512	32,383
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Accumulated Loss	(298)	(210)
Corporate Debt Securities
Schedule of Available-for-sale Securities
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	1,806,212	1,338,232
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Accumulated Loss	(25,141)	(5,459)
Available-for-sale securities in a continuous unrealized loss position for more than twelve months, fair value	461,358	500,689
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Accumulated Loss	(6,970)	(4,666)
Municipal Securities
Schedule of Available-for-sale Securities
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	17,987	11,805
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Accumulated Loss	(279)	(115)
Available-for-sale securities in a continuous unrealized loss position for more than twelve months, fair value	945	598
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Accumulated Loss	(24)	(17)
Foreign Government Securities
Schedule of Available-for-sale Securities
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	3,787	2,388
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Accumulated Loss	(65)	(8)
U.S. Treasury Securities
Schedule of Available-for-sale Securities
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than Twelve Months, Fair Value	516,896	593,296
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Accumulated Loss	(2,231)	(2,087)
Available-for-sale securities in a continuous unrealized loss position for more than twelve months, fair value	302,303	338,950
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Accumulated Loss	(1,305)	(1,465)
Fixed Income Investments
Fair Value and Gross Unrealized Losses Related to Available-For-Sale Securities
Available-for-sale Securities, Amortized Cost Basis	3,382,268	3,525,217
Fixed Income Investments | Asset-backed Securities
Fair Value and Gross Unrealized Losses Related to Available-For-Sale Securities
Available-for-sale Securities, Amortized Cost Basis	84,710	98,403
Fixed Income Investments | Corporate Debt Securities
Fair Value and Gross Unrealized Losses Related to Available-For-Sale Securities
Available-for-sale Securities, Amortized Cost Basis	2,451,735	2,461,691
Fixed Income Investments | Municipal Securities
Fair Value and Gross Unrealized Losses Related to Available-For-Sale Securities
Available-for-sale Securities, Amortized Cost Basis	19,236	21,189
Fixed Income Investments | Foreign Government Securities
Fair Value and Gross Unrealized Losses Related to Available-For-Sale Securities
Available-for-sale Securities, Amortized Cost Basis	3,852	2,396
Fixed Income Investments | U.S. Treasury Securities
Fair Value and Gross Unrealized Losses Related to Available-For-Sale Securities
Available-for-sale Securities, Amortized Cost Basis	$ 822,735	$ 941,538

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Cash, Cash Equivalents and Short-Term Investments (Details 2) $ in Thousands	Jun. 01, 2018 USD ($)
Amortized cost of short-term fixed Income Securities
Due within one year, Amortized Cost	$ 1,602,117
Due between one and two years, Amortized Cost	799,230
Due between two and three years, Amortized Cost	762,818
Due after three years, Amortized Cost	218,103
Total, Amortized Cost	3,382,268
Estimated Fair Value of Short-term fixed Income Securities
Due within one year, Estimated Fair value	1,594,991
Due between one and two years, Estimated Fair value	789,530
Due between two and three years, Estimated Fair value	748,883
Due after three years, Estimated Fair value	212,674
Total, Estimated Fair value	$ 3,346,078

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Fair Value Measurements (Details) $ in Millions	Jun. 01, 2018 USD ($)
Notes 2020 and 2025
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Debt Instrument, Fair Value Disclosure	$ 1,910

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Fair Value Measurements (Details 1) - Fair Value, Measurements, Recurring - USD ($) $ in Thousands	Jun. 01, 2018	Dec. 01, 2017
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Foreign Currency Contracts, Asset, Fair Value Disclosure	$ 40,081	$ 14,198
Deferred Compensation Plan Assets	67,487	56,690
Assets, Fair Value Disclosure	6,096,157	5,610,174
Foreign Currency Contracts, Liability, Fair Value Disclosure	1,280	1,598
Interest Rate Derivative Liabilities, at Fair Value	10,076	1,058
Financial and Nonfinancial Liabilities, Fair Value Disclosure	11,356	2,656
Asset-backed Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	83,887	98,001
Corporate Bonds And Commercial Paper
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Cash and Cash Equivalents, Fair Value Disclosure	21,296
Corporate Debt Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	2,420,272	2,454,260
Foreign Government Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	3,787	2,388
Money Market Mutual Funds
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Cash and Cash Equivalents, Fair Value Disclosure	2,590,037	2,006,741
Time deposits
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Cash and Cash Equivalents, Fair Value Disclosure	31,178	18,843
U.S. Treasury Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	819,199	937,988
Municipal Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	18,933	21,065
Fair Value, Inputs, Level 1
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Foreign Currency Contracts, Asset, Fair Value Disclosure	0	0
Deferred Compensation Plan Assets	3,376	2,573
Assets, Fair Value Disclosure	2,624,591	2,028,157
Foreign Currency Contracts, Liability, Fair Value Disclosure	0	0
Interest Rate Derivative Liabilities, at Fair Value	0	0
Financial and Nonfinancial Liabilities, Fair Value Disclosure	0	0
Fair Value, Inputs, Level 1 | Asset-backed Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	0	0
Fair Value, Inputs, Level 1 | Corporate Bonds And Commercial Paper
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Cash and Cash Equivalents, Fair Value Disclosure	0
Fair Value, Inputs, Level 1 | Corporate Debt Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	0	0
Fair Value, Inputs, Level 1 | Foreign Government Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	0	0
Fair Value, Inputs, Level 1 | Money Market Mutual Funds
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Cash and Cash Equivalents, Fair Value Disclosure	2,590,037	2,006,741
Fair Value, Inputs, Level 1 | Time deposits
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Cash and Cash Equivalents, Fair Value Disclosure	31,178	18,843
Fair Value, Inputs, Level 1 | U.S. Treasury Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	0	0
Fair Value, Inputs, Level 1 | Municipal Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	0	0
Fair Value, Inputs, Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Foreign Currency Contracts, Asset, Fair Value Disclosure	40,081	14,198
Deferred Compensation Plan Assets	64,111	54,117
Assets, Fair Value Disclosure	3,471,566	3,582,017
Foreign Currency Contracts, Liability, Fair Value Disclosure	1,280	1,598
Interest Rate Derivative Liabilities, at Fair Value	10,076	1,058
Financial and Nonfinancial Liabilities, Fair Value Disclosure	11,356	2,656
Fair Value, Inputs, Level 2 | Asset-backed Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	83,887	98,001
Fair Value, Inputs, Level 2 | Corporate Bonds And Commercial Paper
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Cash and Cash Equivalents, Fair Value Disclosure	21,296
Fair Value, Inputs, Level 2 | Corporate Debt Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	2,420,272	2,454,260
Fair Value, Inputs, Level 2 | Foreign Government Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	3,787	2,388
Fair Value, Inputs, Level 2 | Money Market Mutual Funds
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Cash and Cash Equivalents, Fair Value Disclosure	0	0
Fair Value, Inputs, Level 2 | Time deposits
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Cash and Cash Equivalents, Fair Value Disclosure	0	0
Fair Value, Inputs, Level 2 | U.S. Treasury Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	819,199	937,988
Fair Value, Inputs, Level 2 | Municipal Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	18,933	21,065
Fair Value, Inputs, Level 3
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Foreign Currency Contracts, Asset, Fair Value Disclosure	0	0
Deferred Compensation Plan Assets	0	0
Assets, Fair Value Disclosure	0	0
Foreign Currency Contracts, Liability, Fair Value Disclosure	0	0
Interest Rate Derivative Liabilities, at Fair Value	0	0
Financial and Nonfinancial Liabilities, Fair Value Disclosure	0	0
Fair Value, Inputs, Level 3 | Asset-backed Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	0	0
Fair Value, Inputs, Level 3 | Corporate Bonds And Commercial Paper
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Cash and Cash Equivalents, Fair Value Disclosure	0
Fair Value, Inputs, Level 3 | Corporate Debt Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	0	0
Fair Value, Inputs, Level 3 | Foreign Government Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	0	0
Fair Value, Inputs, Level 3 | Money Market Mutual Funds
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Cash and Cash Equivalents, Fair Value Disclosure	0	0
Fair Value, Inputs, Level 3 | Time deposits
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Cash and Cash Equivalents, Fair Value Disclosure	0	0
Fair Value, Inputs, Level 3 | U.S. Treasury Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	0	0
Fair Value, Inputs, Level 3 | Municipal Securities
Fair Value, Balance Sheet Grouping, Financial Statement Captions
Estimated Fair Value, short-term investments	$ 0	$ 0

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Derivatives and Hedging Activities (Details) - USD ($) $ in Thousands		6 Months Ended
		Jun. 01, 2018	Dec. 01, 2017	Jun. 13, 2014	Feb. 28, 2010
Derivative, Fair Value, Net [Abstract]
Fair value asset derivatives		$ 40,081	$ 14,198
Fair value liability derivatives		11,356	2,656
Derivatives designated as hedging instruments | Foreign Exchange Option Contracts
Derivative, Fair Value, Net [Abstract]
Fair value asset derivatives	[1],[2]	38,918	12,918
Fair value liability derivatives	[1],[2]	0	0
Derivatives designated as hedging instruments | Interest Rate Swap
Derivative, Fair Value, Net [Abstract]
Fair value asset derivatives	[3]	0	0
Fair value liability derivatives	[3]	10,076	1,058
Derivatives not designated as hedging instruments | Foreign Exchange Forward Contracts
Derivative, Fair Value, Net [Abstract]
Fair value asset derivatives	[2]	1,163	1,280
Fair value liability derivatives	[2]	$ 1,280	$ 1,598
Notes 2020
Derivative, Fair Value, Net [Abstract]
Debt Instrument, Interest Rate, Stated Percentage					4.75%
Senior Notes					$ 900,000
Cash Flow Hedging | Foreign Exchange Contract
Derivative, Fair Value, Net [Abstract]
Maximum Remaining Maturity of Foreign Currency Derivatives		12 months
Fair Value Hedging
Derivative, Fair Value, Net [Abstract]
Derivative, Notional Amount				$ 900,000
Derivative, Fixed Interest Rate				4.75%

[1] Hedging effectiveness expected to be recognized into income within the next twelve months.

[2] Included in prepaid expenses and other current assets and accrued expenses for asset derivatives and liability derivatives, respectively, on our condensed consolidated balance sheets.

[3] Included in other liabilities on our condensed consolidated balance sheets.

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Derivatives and Hedging Activities (Details 1) - USD ($) $ in Thousands	3 Months Ended			6 Months Ended
	Jun. 01, 2018		Jun. 02, 2017	Jun. 01, 2018	Jun. 02, 2017
Foreign Exchange Option Contracts
Derivative Instruments, Gain (Loss)
Derivative Instruments Not Designated as Hedging Instruments, Gain (Loss), Net	$ 0	[1]	$ 0	$ 0	$ 0
Foreign Exchange Forward Contracts
Derivative Instruments, Gain (Loss)
Derivative Instruments Not Designated as Hedging Instruments, Gain (Loss), Net	2,784	[1]	2,448	(877)	3,536
Cash Flow Hedging | Foreign Exchange Option Contracts
Derivative Instruments, Gain (Loss)
Derivative Instruments, Gain (Loss) Recognized in Other Comprehensive Income (Loss), Effective Portion, Net	31,104	[2]	(4,579)	29,767	2,130
Derivative Instruments, Gain (Loss) Reclassified from Accumulated OCI into Income, Effective Portion, Net	337	[3]	13,315	1,359	31,624
Derivative Instruments, Gain (Loss) Recognized in Income, Ineffective Portion and Amount Excluded from Effectiveness Testing, Net	(12,084)	[4]	(9,615)	(22,410)	(15,652)
Cash Flow Hedging | Foreign Exchange Forward Contracts
Derivative Instruments, Gain (Loss)
Derivative Instruments, Gain (Loss) Recognized in Other Comprehensive Income (Loss), Effective Portion, Net	0	[2]	0	0	0
Derivative Instruments, Gain (Loss) Reclassified from Accumulated OCI into Income, Effective Portion, Net	0	[3]	0	0	0
Derivative Instruments, Gain (Loss) Recognized in Income, Ineffective Portion and Amount Excluded from Effectiveness Testing, Net	$ 0	[4]	$ 0	$ 0	$ 0

[1] Classified in interest and other income (expense), net

[2] Net change in the fair value of the effective portion classified in other comprehensive income (“OCI”).

[3] Effective portion classified as revenue.

[4] Ineffective portion and amount excluded from effectiveness testing classified in interest and other income (expense), net.

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Goodwill and Purchased and Other Intangibles (Details) - USD ($) $ in Thousands	Jun. 01, 2018	Dec. 01, 2017
Finite-Lived Intangible Assets
Cost	$ 864,959	$ 987,417
Accumulated Amortization	(544,481)	(601,759)
Net	320,478	385,658	[1]
Purchased technology
Finite-Lived Intangible Assets
Cost	184,025	223,252
Accumulated Amortization	(88,062)	(110,433)
Net	95,963	112,819
Total other intangible assets
Finite-Lived Intangible Assets
Cost	680,934	764,165
Accumulated Amortization	(456,419)	(491,326)
Net	224,515	272,839
Customer contracts and relationships
Finite-Lived Intangible Assets
Cost	546,138	577,484
Accumulated Amortization	(363,256)	(356,613)
Net	182,882	220,871
Trademarks
Finite-Lived Intangible Assets
Cost	35,255	76,255
Accumulated Amortization	(17,399)	(56,094)
Net	17,856	20,161
Acquired rights to use technology
Finite-Lived Intangible Assets
Cost	61,916	71,130
Accumulated Amortization	(48,354)	(54,223)
Net	13,562	16,907
Localization
Finite-Lived Intangible Assets
Cost	645	603
Accumulated Amortization	(503)	(170)
Net	142	433
Other intangibles
Finite-Lived Intangible Assets
Cost	36,980	38,693
Accumulated Amortization	(26,907)	(24,226)
Net	$ 10,073	$ 14,467

[1] The condensed consolidated balance sheet as of December 1, 2017 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.

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Goodwill and Purchased and Other Intangibles (Details 1) $ in Thousands	Jun. 01, 2018 USD ($)
Purchased technology
Amortization Expense in Future Periods
Remainder of 2018	$ 18,729
2019	34,173
2020	31,880
2021	9,391
2022	1,622
Thereafter	168
Total expected amortization expense	95,963
Other intangibles
Amortization Expense in Future Periods
Remainder of 2018	48,720
2019	70,402
2020	39,866
2021	17,218
2022	14,151
Thereafter	34,158
Total expected amortization expense	$ 224,515

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Goodwill and Purchased and Other Intangibles (Details Numeric) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 01, 2018	Jun. 02, 2017	Jun. 01, 2018	Jun. 02, 2017	Dec. 01, 2017	[1]
Goodwill and Intangible Assets Disclosure [Abstract]
Goodwill	$ 5,823,792		$ 5,823,792		$ 5,821,561
Finite-Lived Intangible Assets
Amortization of purchased and other intangible assets	34,600	$ 39,100	68,500	$ 77,200
Amortization expense included in cost of sales	$ 17,400	$ 19,500	$ 34,000	$ 38,200

[1] The condensed consolidated balance sheet as of December 1, 2017 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.

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Accrued Expenses (Details) - USD ($) $ in Thousands	Jun. 01, 2018	Dec. 01, 2017
Accrued Expense
Accrued compensation and benefits	$ 432,871	$ 417,742
Accrued media costs	113,314	134,525
Sales and marketing allowances	37,621	47,389
Accrued corporate marketing	76,412	72,087
Taxes payable	46,350	49,550
Royalties payable	42,052	46,411
Accrued interest expense	25,596	25,594
Other	256,151	200,475
Accrued expenses	$ 1,030,367	$ 993,773	[1]

[1] The condensed consolidated balance sheet as of December 1, 2017 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.

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Income Taxes (Details) $ in Millions	3 Months Ended	6 Months Ended
	Jun. 01, 2018 USD ($)	Jun. 01, 2018 USD ($)
Income Tax Disclosure [Abstract]
US Federal statutory tax rate effective before the Tax Cuts and Jobs Act 2017		35.00%
US Federal statutory tax rate effective after the Tax Cuts and Jobs Act 2017		21.00%
One-time transition tax due to Tax Cuts and Jobs Act 2017	15.50%	15.50%
One-time transition tax other income due to Tax Cuts and Jobs act of 2017	8.00%	8.00%
Blended U.S. Federal Statutory tax Rate for FY2018 due to Tax Cuts and Jobs Act 2017		22.20%
Provisional tax charge due to Tax Cuts and Jobs Act 2017		$ 10
Provisional transition tax expense on deferred foreign earnings due to Tax Cuts and Job Act 2017	$ 28	118
Reduction of deferred tax assets due to Tax Cuts and Jobs Act 2017	$ 72
Reduction of long-term income taxes payable due to Tax Cuts and Jobs Act 2017		44
Provisional transition tax expense plus other ancillary effects recorded in the first fiscal quarter in 2018 due to the Tax Cuts and Jobs Act 2017		86
Provisional transition tax expense of long term income taxes payable due to the Tax Cuts and Jobs Act 2017		533
Reduction in deferred tax liability due to Tax Cuts and Jobs Act 2017		415
Reclassification of long term income taxes payable to short term income taxes payable due to Tax Cuts and Jobs Act 2017		$ 39

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Stock-Based Compensation (Details) - shares shares in Thousands	6 Months Ended		12 Months Ended
	Jun. 01, 2018		Dec. 01, 2017
Restricted Stock Unit
Shares Activity
Beginning outstanding balance	9,304		8,316
Awarded, Shares	3,324		5,018
Released, Shares	(3,206)		(3,859)
Forfeited, Shares	(376)		(766)
Due To Acquisition	0		595
Ending outstanding balance	9,046		9,304
Performance Shares | Shares Granted
Shares Activity
Beginning outstanding balance	1,534		1,630
Awarded, Shares	837	[1]	1,082	[2]
Achieved	(1,050)		(1,135)
Forfeited, Shares	(120)		(43)
Ending outstanding balance	1,201		1,534
Performance Shares | Maximum Shares Eligible to Receive
Shares Activity
Beginning outstanding balance	3,068		3,261
Awarded, Shares	628		1,040
Achieved	(1,054)		(1,147)
Forfeited, Shares	(240)		(86)
Ending outstanding balance	2,402		3,068
Performance Shares | Program 2015
Share-based Compensation Arrangement by Share-based Payment Award
Actual Percentage Achieved	200.00%
Actual Shares Achieved	1,000
Shares Activity
Awarded, Shares	500
Performance Shares | Program 2014
Share-based Compensation Arrangement by Share-based Payment Award
Actual Percentage Achieved			198.00%
Actual Shares Achieved			1,100
Shares Activity
Awarded, Shares			600

[1] Included in the 0.8 million shares awarded during the six months ended June 1, 2018 were 0.5 million shares awarded for the final achievement of the 2015 Performance Share program. The remaining awarded shares were for the 2018 Performance Share Program.

[2] Included in the 1.1 million shares awarded during the fiscal year ended December 1, 2017 were 0.6 million shares awarded for the final achievement of the 2014 Performance Share program. The remaining awarded shares were for the 2017 Performance Share Program

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Stock-Based Compensation (Details 1) - USD ($) $ / shares in Units, shares in Thousands, $ in Millions		6 Months Ended
		Jun. 01, 2018	Jun. 02, 2017	Dec. 01, 2017	Dec. 02, 2016
Restricted stock units outstanding
Share Price		$ 251.31	$ 143.48
Restricted Stock Unit
Restricted stock units outstanding
Number of shares outstanding		9,046	9,655	9,304	8,316
Outstanding weighted average remaining contractual life (in years)		1 year 4 months 10 days	1 year 5 months 1 day
Shares outstanding aggregate intrinsic value	[1]	$ 2,273.3	$ 1,385.4
Number of shares vested and expected to vest		8,224	8,741
Weighted Average Remaining Contractual Life Vested And Expected To Vest		1 year 3 months 18 days	1 year 4 months 10 days
Vested and expected to vest aggregate intrinsic value	[1]	$ 2,066.9	$ 1,254.2

[1] 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 June 1, 2018 and June 2, 2017 were $251.31 and $143.48, respectively.

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Stock-Based Compensation (Details 2) - Employee Stock Purchase Plan	6 Months Ended
	Jun. 01, 2018	Jun. 02, 2017
Valuation Assumptions Volatility Range
From	26.00%	22.00%
To	27.00%	25.00%
Valuation Assumptions Risk Free Interest Rate Range
From	1.54%	0.62%
To	1.89%	1.20%
From
Valuation Assumptions Expected Life (In Years)
Expected life (in years)	6 months	6 months
To
Valuation Assumptions Expected Life (In Years)
Expected life (in years)	2 years	2 years

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Stock-Based Compensation (Details 3) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 01, 2018	Jun. 02, 2017	Jun. 01, 2018	Jun. 02, 2017
Option Grants and Stock Purchase Rights
Total stock-based compensation costs
Stock-based compensation costs	$ 14,470	$ 12,877	$ 29,402	$ 24,643
Restricted Stock Units and Performance Share Awards
Total stock-based compensation costs
Stock-based compensation costs	130,907	103,943	251,500	193,044
Cost of Subscription Revenue | Option Grants and Stock Purchase Rights
Total stock-based compensation costs
Stock-based compensation costs	729	878	1,497	1,271
Cost of Subscription Revenue | Restricted Stock Units and Performance Share Awards
Total stock-based compensation costs
Stock-based compensation costs	4,526	4,673	8,470	6,834
Cost of Service and Support Revenue | Option Grants and Stock Purchase Rights
Total stock-based compensation costs
Stock-based compensation costs	1,647	1,501	3,663	3,224
Cost of Service and Support Revenue | Restricted Stock Units and Performance Share Awards
Total stock-based compensation costs
Stock-based compensation costs	2,680	1,677	5,666	4,742
Research and Development Expense | Option Grants and Stock Purchase Rights
Total stock-based compensation costs
Stock-based compensation costs	5,301	4,435	10,649	8,467
Research and Development Expense | Restricted Stock Units and Performance Share Awards
Total stock-based compensation costs
Stock-based compensation costs	63,608	42,539	117,681	75,633
Sales and Marketing | Option Grants and Stock Purchase Rights
Total stock-based compensation costs
Stock-based compensation costs	5,443	4,801	10,763	9,189
Sales and Marketing | Restricted Stock Units and Performance Share Awards
Total stock-based compensation costs
Stock-based compensation costs	42,747	35,439	81,595	67,904
General and Administrative | Option Grants and Stock Purchase Rights
Total stock-based compensation costs
Stock-based compensation costs	1,350	1,262	2,830	2,492
General and Administrative | Restricted Stock Units and Performance Share Awards
Total stock-based compensation costs
Stock-based compensation costs	$ 17,346	$ 19,615	$ 38,088	$ 37,931

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Stock-Based Compensation (Details Numeric) - USD ($) $ / shares in Units, shares in Millions, $ in Millions	6 Months Ended		12 Months Ended
	Jun. 01, 2018	Jun. 02, 2017	Dec. 01, 2017
Share-based Compensation Arrangement by Share-based Payment Award
Share Price	$ 251.31	$ 143.48
Stock Based Compensation (Numeric)
Unrecognized compensation cost, non-vested awards	$ 1,100.0
Period for recognition, unrecognized compensation cost	2 years 26 days
Performance Shares
Stock Based Compensation (Numeric)
Maximum Target Percentage Allowed Under Program	200.00%
Stock Options
Stock Based Compensation (Numeric)
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	0.1		0.3
Employee Stock Purchase Plan
Stock Based Compensation (Numeric)
Shares Purchased, ESPP	0.7	0.7
Average purchase price of shares, ESPP	$ 91.74	$ 71.71
Total Intrinsic Value Of Shares Purchased	$ 54.3	$ 20.4
Program 2015 | Performance Shares
Stock Based Compensation (Numeric)
Actual Percentage Achieved	200.00%
Actual Shares Achieved	1.0
Program 2014 | Performance Shares
Stock Based Compensation (Numeric)
Actual Percentage Achieved			198.00%
Actual Shares Achieved			1.1

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Stockholders' Equity (Details) - USD ($) $ in Thousands		3 Months Ended		6 Months Ended
		Jun. 01, 2018	Jun. 02, 2017	Jun. 01, 2018	Jun. 02, 2017
Changes in retained earnings
Beginning Balance	[1]			$ 9,573,870
Net income		$ 663,167	$ 374,390	1,246,243	$ 772,836
Re-issuance of treasury stock				(348,729)
Adjustments to equity as a result of the Tax Act				318
Ending Balance		$ 10,471,066		$ 10,471,066

[1] The condensed consolidated balance sheet as of December 1, 2017 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.

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Stockholders' Equity (Details 1) - USD ($) $ in Thousands		3 Months Ended		6 Months Ended
		Jun. 01, 2018	Jun. 02, 2017	Jun. 01, 2018		Jun. 02, 2017
Gross unrealized gains, available-for-sale securities
Beginning balance, unrealized gains on available-for-sale securities				$ 2,704
Gross unrealized gains on available for sale securities, increase or decrease				(1,865)
Gross unrealized gains on available for sale securities, reclassification adjustments				(189)
Ending balance, unrealized gains on available-for-sale securities		$ 650		650
Gross unrealized losses, available-for-sale securities
Beginning balance, unrealized losses on available-for-sale securities				(14,220)
Gross unrealized losses on available for sale securities increase or decrease				(23,004)
Gross unrealized losses on available for sale securities, reclassification adjustments				386
Ending balance, unrealized losses on available-for-sale securities		(36,838)		(36,838)
Net unrealized gains on available-for-sale securities
Beginning Balance, net unrealized gains on available-for-sale securities				(11,516)
Net unrealized gains on available for sale securities, increase or decrease		(1,721)	$ 8,665	(24,869)		$ 9,690
Net unrealized gains on available for sale securities, reclassification adjustments		75	(246)	197	[1]	(406)
Ending Balance, net unrealized gains on available-for-sale securities		(36,188)		(36,188)
Net unrealized gains on derivatives designated as hedging instruments
Beginning balance, net unrealized gains on derivative instruments designated as hedging instruments				(3,367)
Net unrealized gains on derivative instruments designated as hedging instruments, increase or decrease		31,104	(4,579)	29,767		2,130
Net unrealized gains on derivative instruments designated as hedging instruments, reclassification adjustments		(37)	(13,065)	(2,177)	[2]	(31,249)
Ending balance, net unrealized gains on derivative instruments designated as hedging instruments		24,223		24,223
Cumulative foreign currency translation adjustments
Beginning balance, cumulative foreign currency translation adjustments				(96,938)
Cumulative foreign currency translation adjustment, increase or decrease		(48,713)	$ 47,881	(20,327)		$ 46,685
Cumulative foreign currency translation adjustment, reclassification adjustments				0
Ending balance, cumulative foreign currency translation adjustments		(117,265)		(117,265)
Accumulated other comprehensive income totals
Beginning balance, total accumulated other comprehensive income, net of taxes	[3]			(111,821)
Accumulated other comprehensive income, increase or decrease				(15,429)
Accumulated other comprehensive income, reclassification adjustments				(1,980)
Ending balance, total accumulated other comprehensive income, net of taxes		$ (129,230)		$ (129,230)

[1] Reclassification adjustments for gains / losses on available-for-sale securities are classified in interest and other income (expense), net.

[2] Reclassification adjustments for gains / losses on derivative instruments are classified in revenue.

[3] The condensed consolidated balance sheet as of December 1, 2017 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.

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Stockholders' Equity (Details 2) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 01, 2018	Jun. 02, 2017	Jun. 01, 2018	Jun. 02, 2017
Tax, Available-for-sale Securities
Unrealized gains / losses	$ 0	$ 40	$ 0	$ 288
Reclassification adjustments	0	0	0	(110)
Subtotal, Available-for-sale Securities	0	40	0	178
Tax, Derivatives Designated as Hedging Instruments
Reclassification adjustments	(100)	(149)	(1,626)	(433)
Foreign currency translation adjustments	0	1,261	(1,742)	1,647
Total taxes, other comprehensive income	$ (100)	$ 1,152	$ (3,368)	$ 1,392

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Stockholders' Equity (Details Numeric) - USD ($) $ / shares in Units, $ in Thousands, shares in Millions	1 Months Ended	6 Months Ended
	Jun. 27, 2018	Jun. 01, 2018	Jun. 02, 2017	May 21, 2018	Jan. 20, 2017
Payments for Repurchase of Common Stock		$ 1,000,000	$ 500,000
Repurchased Shares		4.3	4.3
Repurchased Shares, Average Price		$ 208.69	$ 118.00
Up-Front Payments Remaining		$ 211,200
Stock Repurchase Authority 2018
Stock Repurchase Program, Authorized Amount				$ 8,000,000
Stock repurchase Program 2017
Stock Repurchase Program, Authorized Amount					$ 2,500,000
Subsequent Event | Stock repurchase Program 2017
Payments for Repurchase of Common Stock	$ 750,000
Stock Repurchase Program, Remaining Authorized Repurchase Amount	$ 150,000

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Net Income Per Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 01, 2018	Jun. 02, 2017	Jun. 01, 2018	Jun. 02, 2017
Earnings Per Share [Abstract]
Net income	$ 663,167	$ 374,390	$ 1,246,243	$ 772,836
Shares used to compute basic net income per share	491,914	494,371	491,993	494,492
Dilutive potential common shares:
Unvested restricted stock and performance share awards	6,212	5,637	7,019	6,175
Stock options	126	343	154	365
Shares used to compute diluted net income per share	498,252	500,351	499,166	501,032
Basic net income per share	$ 1.35	$ 0.76	$ 2.53	$ 1.56
Diluted net income per share	$ 1.33	$ 0.75	$ 2.50	$ 1.54

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Debt (Details) - USD ($) $ in Thousands	1 Months Ended		3 Months Ended
	Jan. 21, 2015	Feb. 28, 2010	Jun. 01, 2018	Mar. 02, 2012	Dec. 01, 2017	[1]	Jun. 13, 2014
Debt Instrument [Line Items]
Long-term Debt			$ 1,874,057		$ 1,881,421
Line of Credit Facility
Total senior unsecured revolving credit facility				$ 1,000,000
Option to request additional commitments on credit facility				500,000
Maximum aggregate, credit facility				$ 1,500,000
Line of Credit Facility, Amount Outstanding			0
From
Line of Credit Facility
Line of Credit Facility, Commitment Fee Percentage				0.08%
To
Line of Credit Facility
Line of Credit Facility, Commitment Fee Percentage				0.20%
Notes 2020 and 2025
Debt Instrument [Line Items]
Debt Instrument, Periodic Payment, Interest			37,600
Fair value of the Notes			$ 1,910,000
Repurchase notes at price of their principal amount, plus accrued and unpaid interest	101.00%
Notes 2020
Debt Instrument [Line Items]
Senior notes, issued		$ 900,000
Senior notes, interest rate		4.75%
Proceeds from debt issuance		$ 900,000
Issuance discount		5,500
Issuance cost		$ 6,400
Effective Interest rate		4.92%
Notes 2025
Debt Instrument [Line Items]
Senior notes, issued	$ 1,000,000
Senior notes, interest rate	3.25%
Proceeds from Issuance of Debt	$ 989,300
Issuance discount	10,700
Issuance cost	$ 7,900
Effective Interest rate	3.67%
Scenario i | Line of Credit | From
Line of Credit Facility
Debt Instrument, Basis Spread on Variable Rate				0.795%
Scenario i | Line of Credit | To
Line of Credit Facility
Debt Instrument, Basis Spread on Variable Rate				1.30%
Scenario ii | Line of Credit
Line of Credit Facility
Percentage Added to Federal Funds Effective Rate in Determining Interest Rate				0.50%
Percentage Added to LIBOR in Determining Interest Rate				1.00%
Scenario ii | Line of Credit | From
Line of Credit Facility
Margin Added to LIBOR in Determining Interest Rate				0.00%
Scenario ii | Line of Credit | To
Line of Credit Facility
Margin Added to LIBOR in Determining Interest Rate				0.30%
Fair Value Hedging
Debt Instrument [Line Items]
Derivative, Notional Amount							$ 900,000
Derivative, Fixed Interest Rate							4.75%

[1] The condensed consolidated balance sheet as of December 1, 2017 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.

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Non-Operating Income (Expense) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 01, 2018	Jun. 02, 2017	Jun. 01, 2018	Jun. 02, 2017
Interest and other income (expense), net:
Interest income	$ 25,771	$ 15,216	$ 48,401	$ 29,373
Foreign exchange gains (losses)	(14,222)	(10,349)	(20,111)	(17,480)
Realized gains on fixed income investment	6	356	190	650
Realized losses on fixed income investment	(81)	(110)	(386)	(244)
Other interest and other income (expense), net	125	41	177	61
Interest and other income (expense), net	11,599	5,154	28,271	12,360
Interest expense	(20,363)	(18,347)	(40,262)	(36,477)
Investment gains (losses), net:
Realized investment gains	503	431	4,497	2,390
Unrealized investment gains	576	1,298	0	1,896
Unrealized investment losses	0	0	(422)	0
Investment gains (losses), net	1,079	1,729	4,075	4,286
Non-operating income (expense), net	$ (7,685)	$ (11,464)	$ (7,916)	$ (19,831)

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Segments (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 01, 2018	Jun. 02, 2017	Jun. 01, 2018	Jun. 02, 2017
Segment Reporting [Abstract]
Revenue	$ 2,195,360	$ 1,772,190	$ 4,274,307	$ 3,453,836
Cost of revenue	281,344	239,360	540,246	476,697
Gross profit	$ 1,914,016	$ 1,532,830	$ 3,734,061	$ 2,977,139
Gross profit as a percentage of revenue	87.00%	86.00%	87.00%	86.00%
Digital Media
Segment Reporting [Abstract]
Revenue	$ 1,546,424	$ 1,211,988	$ 3,006,985	$ 2,350,067
Cost of revenue	54,760	58,350	110,229	113,402
Gross profit	$ 1,491,664	$ 1,153,638	$ 2,896,756	$ 2,236,665
Gross profit as a percentage of revenue	96.00%	95.00%	96.00%	95.00%
Digital Experience
Segment Reporting [Abstract]
Revenue	$ 585,952	$ 495,415	$ 1,140,059	$ 972,687
Cost of revenue	220,696	175,164	419,488	351,927
Gross profit	$ 365,256	$ 320,251	$ 720,571	$ 620,760
Gross profit as a percentage of revenue	62.00%	65.00%	63.00%	64.00%
Publishing
Segment Reporting [Abstract]
Revenue	$ 62,984	$ 64,787	$ 127,263	$ 131,082
Cost of revenue	5,888	5,846	10,529	11,368
Gross profit	$ 57,096	$ 58,941	$ 116,734	$ 119,714
Gross profit as a percentage of revenue	91.00%	91.00%	92.00%	91.00%

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Segments Details Numeric (Details)	6 Months Ended
	Jun. 01, 2018 positions
Segment Reporting [Abstract]
Number of Reportable Segments	3