UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________

FORM 10-Q

(Mark One)

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

For the quarterly period ended August 30, 2019

 or

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

For the transition period from                   to                   

Commission File Number: 0-15175

ADOBE INC.

(Exact name of registrant as specified in its charter)

________________________________

Delaware	77-0019522
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

345 Park Avenue, San Jose, California 95110-2704

(Address of principal executive offices and zip code)

(408) 536-6000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.0001 par value per share	ADBE	NASDAQ

________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer (Do not check if a smaller reporting company) ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ☐ No ☒

The number of shares outstanding of the registrant’s common stock as of September 20, 2019 was 484,078,609.

ADOBE INC.

FORM 10-Q

TABLE OF CONTENTS

		Page No.
PART I—FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:	3
	Condensed Consolidated Balance Sheets August 30, 2019 and November 30, 2018	3
	Condensed Consolidated Statements of Income Three and Nine Months Ended August 30, 2019 and August 31, 2018	4
	Condensed Consolidated Statements of Comprehensive Income Three and Nine Months Ended August 30, 2019 and August 31, 2018	5
	Condensed Consolidated Statements of Stockholders’ Equity Three and Nine Months Ended August 30, 2019 and August 31, 2018	6
	Condensed Consolidated Statements of Cash Flows Nine Months Ended August 30, 2019 and August 31, 2018	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	54
Item 4.	Controls and Procedures	54
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 4.	Mine Safety Disclosures	67
Item 5.	Other Information	67
Item 6.	Exhibits	68
Signature		73
Summary of Trademarks		74

2

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

	August 30, 2019			November 30, 2018
	(Unaudited)			(*)
ASSETS
Current assets:
Cash and cash equivalents	$	2,209,047		$	1,642,775
Short-term investments	1,441,741			1,586,187
Trade receivables, net of allowances for doubtful accounts of $11,778 and $14,981, respectively	1,371,697			1,315,578
Prepaid expenses and other current assets	727,611			312,499
Total current assets	5,750,096			4,857,039
Property and equipment, net	1,244,011			1,075,072
Goodwill	10,688,068			10,581,048
Purchased and other intangibles, net	1,815,625			2,069,001
Other assets	557,080			186,522
Total assets	$	20,054,880		$	18,768,682
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade payables	$	186,999		$	186,258
Accrued expenses	1,302,753			1,163,185
Debt	3,148,587			—
Deferred revenue	3,120,186			2,915,974
Income taxes payable	44,441			35,709
Total current liabilities	7,802,966			4,301,126
Long-term liabilities:
Debt	988,429			4,124,800
Deferred revenue	135,750			137,630
Income taxes payable	585,774			644,101
Deferred income taxes	129,401			46,702
Other liabilities	169,787			152,209
Total liabilities	9,812,107			9,406,568
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;  484,903 and 487,663 shares outstanding, respectively	61			61
Additional paid-in-capital	6,334,612			5,685,337
Retained earnings	13,976,701			11,815,597
Accumulated other comprehensive income (loss)	(193,949		)	(148,130		)
Treasury stock, at cost (115,931 and 113,171 shares, respectively), net of re-issuances	(9,874,652		)	(7,990,751		)
Total stockholders’ equity	10,242,773			9,362,114
Total liabilities and stockholders’ equity	$	20,054,880		$	18,768,682

^{_________________________________________} 

(*) The condensed consolidated balance sheet as of November 30, 2018 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

3

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	August 30, 2019			August 31, 2018			August 30, 2019			August 31, 2018
Revenue:
Subscription	$	2,546,571		$	2,021,505		$	7,307,635		$	5,737,994
Product	157,321			149,127			480,691			471,728
Services and support	130,234			120,444			391,026			355,661
Total revenue	2,834,126			2,291,076			8,179,352			6,565,383
Cost of revenue:
Subscription	303,885			199,157			888,392			550,197
Product	9,146			11,454			30,596			35,110
Services and support	102,932			84,881			301,749			250,431
Total cost of revenue	415,963			295,492			1,220,737			835,738
Gross profit	2,418,163			1,995,584			6,958,615			5,729,645
Operating expenses:
Research and development	489,827			398,957			1,430,422			1,121,854
Sales and marketing	812,314			670,084			2,442,759			1,897,256
General and administrative	219,256			184,063			654,699			532,543
Amortization of purchased intangibles	42,954			23,874			132,546			58,169
Total operating expenses	1,564,351			1,276,978			4,660,426			3,609,822
Operating income	853,812			718,606			2,298,189			2,119,823
Non-operating income (expense):
Interest and other income (expense), net	16,552			1,608			23,376			29,879
Interest expense	(39,529		)	(21,107		)	(120,699		)	(61,369		)
Investment gains (losses), net	3,653			2,251			46,728			6,326
Total non-operating income (expense), net	(19,324		)	(17,248		)	(50,595		)	(25,164		)
Income before income taxes	834,488			701,358			2,247,594			2,094,659
Provision for income taxes	41,725			35,067			147,997			182,125
Net income	$	792,763		$	666,291		$	2,099,597		$	1,912,534
Basic net income per share	$	1.63		$	1.36		$	4.31		$	3.89
Shares used to compute basic net income per share	485,848			490,025			487,145			491,336
Diluted net income per share	$	1.61		$	1.34		$	4.26		$	3.84
Shares used to compute diluted net income per share	491,042			496,866			492,480			498,587

4

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	August 30, 2019			August 31, 2018			August 30, 2019			August 31, 2018
	Increase/(Decrease)						Increase/(Decrease)
Net income	$	792,763		$	666,291		$	2,099,597		$	1,912,534
Other comprehensive income (loss), net of taxes:
Available-for-sale securities:
Unrealized gains / losses on available-for-sale securities	6,867			5,849			29,178			(19,020		)
Reclassification adjustment for recognized gains / losses on available-for-sale securities	(36		)	9,645			157			9,842
Net increase (decrease) from available-for-sale securities	6,831			15,494			29,335			(9,178		)
Derivatives designated as hedging instruments:
Unrealized gains / losses on derivative instruments	(27,031		)	17,524			(8,232		)	47,290
Reclassification adjustment for realized gains / losses on derivative instruments	(11,034		)	(16,494		)	(38,397		)	(18,671		)
Net increase (decrease) from derivatives designated as hedging instruments	(38,065		)	1,030			(46,629		)	28,619
Foreign currency translation adjustments	(18,351		)	(15,342		)	(28,525		)	(35,668		)
Other comprehensive income (loss), net of taxes	(49,585		)	1,182			(45,819		)	(16,227		)
Total comprehensive income, net of taxes	$	743,178		$	667,473		$	2,053,778		$	1,896,307

5

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

	Three Months Ended August 30, 2019
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock
	Shares	Amount									Shares		Amount			Total
Balances at May 31, 2019	600,834	$	61	$	6,050,800	$	13,183,938	$	(144,364	)	(114,561	)	$	(9,158,742	)	$	9,931,693
Net income	—	—		—		792,763		—			—		—			792,763
Other comprehensive income (losses), net of taxes	—	—		—		—		(49,585		)	—		—			(49,585		)
Re-issuance of treasury stock under stock compensation plans	—	—		89,520		—		—			1,222		33,516			123,036
Purchase of treasury stock	—	—		—		—		—			(2,592	)	(750,000		)	(750,000		)
Stock-based compensation	—	—		194,292		—		—			—		—			194,292
Value of shares in deferred compensation plan	—	—		—		—		—			—		574			574
Balances at August 30, 2019	600,834	$	61	$	6,334,612	$	13,976,701	$	(193,949	)	(115,931	)	$	(9,874,652	)	$	10,242,773

	Three Months Ended August 31, 2018
	Common Stock			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Treasury Stock
	Shares	Amount									Shares		Amount			Total
Balances at June 1, 2018	600,834	$	61	$	5,354,175	$	10,471,066	$	(129,230	)	(110,399	)	$	(6,990,489	)	$	8,705,583
Net income	—	—		—		666,291		—			—		—			666,291
Other comprehensive income (losses), net of taxes	—	—		—		—		1,182			—		—			1,182
Re-issuance of treasury stock under stock compensation plans	—	—		37,050		—		—			1,431		41,606			78,656
Purchase of treasury stock	—	—		—		—		—			(2,859	)	(750,000		)	(750,000		)
Equity awards assumed for acquisition	—	—		2,784		—		—			—		—			2,784
Stock-based compensation	—	—		155,313		—		—			—		—			155,313
Value of shares in deferred compensation plan	—	—		—		—		—			—		2,116			2,116
Balances at August 31, 2018	600,834	$	61	$	5,549,322	$	11,137,357	$	(128,048	)	(111,827	)	$	(7,696,767	)	$	8,861,925

6

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

(In thousands)

(Unaudited)

	Nine Months Ended August 30, 2019
	Common Stock			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock
	Shares	Amount										Shares		Amount			Total
Balances at November 30, 2018	600,834	$	61	$	5,685,337	$	11,815,597		$	(148,130	)	(113,171	)	$	(7,990,751	)	$	9,362,114
Impacts of ASC 606 adoption	—	—		—		442,319			—			—		—			442,319
Net income	—	—		—		2,099,597			—			—		—			2,099,597
Other comprehensive income (losses), net of taxes	—	—		—		—			(45,819		)	—		—			(45,819		)
Re-issuance of treasury stock under stock compensation plans	—	—		81,512		(380,812		)	—			4,357		119,542			(179,758		)
Purchase of treasury stock	—	—		—		—			—			(7,117	)	(2,000,000		)	(2,000,000		)
Stock-based compensation	—	—		567,763		—			—			—		—			567,763
Value of shares in deferred compensation plan	—	—		—		—			—			—		(3,443		)	(3,443		)
Balances at August 30, 2019	600,834	$	61	$	6,334,612	$	13,976,701		$	(193,949	)	(115,931	)	$	(9,874,652	)	$	10,242,773

	Nine Months Ended August 31, 2018
	Common Stock			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock
	Shares	Amount										Shares		Amount			Total
Balances at December 1, 2017	600,834	$	61	$	5,082,195	$	9,573,870		$	(111,821	)	(109,572	)	$	(6,084,436	)	$	8,459,869
Net income	—	—		—		1,912,534			—			—		—			1,912,534
Other comprehensive income (losses), net of taxes	—	—		—		—			(16,227		)	—		—			(16,227		)
Re-issuance of treasury stock under stock compensation plans	—	—		27,917		(348,729		)	—			4,871		141,645			(179,167		)
Purchase of treasury stock	—	—		—		—			—			(7,126	)	(1,750,000		)	(1,750,000		)
Equity awards assumed for acquisition	—	—		2,784		—			—			—		—			2,784
Stock-based compensation	—	—		436,426		—			—			—		—			436,426
Value of shares in deferred compensation plan	—	—		—		—			—			—		(3,976		)	(3,976		)
Impacts of the U.S. Tax Cut and Jobs Act	—	—		—		(318		)	—			—		—			(318		)
Balances at August 31, 2018	600,834	$	61	$	5,549,322	$	11,137,357		$	(128,048	)	(111,827	)	$	(7,696,767	)	$	8,861,925

7

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	August 30, 2019			August 31, 2018
Cash flows from operating activities:
Net income	$	2,099,597		$	1,912,534
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	441,057			239,772
Stock-based compensation	584,500			439,941
Deferred income taxes	(1,747		)	(418,114		)
Unrealized losses (gains) on investments, net	(43,456		)	(3,115		)
Other non-cash items	2,756			4,844
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Trade receivables, net	(14,050		)	199,002
Prepaid expenses and other assets	(289,957		)	(89,823		)
Trade payables	629			25,362
Accrued expenses	53,074			4,099
Income taxes payable	(39,171		)	433,559
Deferred revenue	252,182			173,250
Net cash provided by operating activities	3,045,414			2,921,311
Cash flows from investing activities:
Purchases of short-term investments	(373,057		)	(541,878		)
Maturities of short-term investments	477,840			606,594
Proceeds from sales of short-term investments	66,463			238,303
Acquisitions, net of cash acquired	(99,817		)	(1,633,041		)
Purchases of property and equipment	(300,384		)	(204,016		)
Purchases of long-term investments, intangibles and other assets	(59,894		)	(15,288		)
Proceeds from sale of long-term investments and other assets	1,674			2,909
Net cash used for investing activities	(287,175		)	(1,546,417		)
Cash flows from financing activities:
Purchases of treasury stock	(2,000,000		)	(1,750,000		)
Proceeds from re-issuance of treasury stock	232,240			189,743
Taxes paid related to net share settlement of equity awards	(411,998		)	(368,910		)
Other financing activities, net	(626		)	(1,132		)
Net cash used for financing activities	(2,180,384		)	(1,930,299		)
Effect of foreign currency exchange rates on cash and cash equivalents	(11,583		)	(3,523		)
Net increase (decrease) in cash and cash equivalents	566,272			(558,928		)
Cash and cash equivalents at beginning of period	1,642,775			2,306,072
Cash and cash equivalents at end of period	$	2,209,047		$	1,747,144
Supplemental disclosures:
Cash paid for income taxes, net of refunds	$	231,813		$	141,674
Cash paid for interest	$	124,599		$	61,754
Non-cash investing activities:
Issuance of stock awards assumed in business acquisitions	$	—		$	2,784

8

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 

(Unaudited)

NOTE 1.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“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 November 30, 2018 on file with the SEC (our “Annual Report”).

Reclassification

Certain immaterial prior year amounts have been reclassified to conform to current year presentation in the notes to the condensed consolidated financial statements.

Recently Adopted Accounting Guidance

On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, Topic 606 (“ASC 606”), 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 new revenue standard replaces most existing revenue recognition guidance in GAAP and permits the use of either the full retrospective or modified retrospective transition method.

On December 1, 2018, the beginning of our fiscal year 2019, we adopted the requirements of the new revenue standard utilizing the modified retrospective method of transition. Prior period information has not been restated and continues to be reported under the accounting standard in effect for those periods. We applied the new revenue standard to contracts that were not completed as of the adoption date, consistent with the transition guidance. Further, adoption of the new revenue standard resulted in changes to our accounting policies for revenue recognition and sales commissions as detailed below.

We recognized the following cumulative effects of initially applying the new revenue standard as of December 1, 2018:

(in thousands)	As of November 30, 2018		ASC 606 Adoption Adjustments			As of December 1, 2018
Assets
Trade receivables, net of allowances for doubtful accounts	$	1,315,578	$	43,028		$	1,358,606
Prepaid expenses and other current assets	312,499		186,220			498,719
Other assets	186,522		273,421			459,943
Liabilities and Stockholders’ Equity
Accrued expenses	1,163,185		30,358			1,193,543
Deferred revenue, current	2,915,974		(52,842		)	2,863,132
Deferred income taxes	46,702		82,834			129,536
Retained earnings	$	11,815,597	$	442,319		$	12,257,916

9

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Below is a summary of the adoption impacts of the new revenue standard:

• We capitalized $413.2 million of contract acquisition costs comprised of sales and partner commission costs at adoption date (included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion), with a corresponding adjustment to retained earnings. We are amortizing these costs over their respective expected period of benefit.

• Revenue for certain contracts that were previously deferred would have been recognized in periods prior to adoption under the new standard. Upon adoption, we recorded the following adjustments to our beginning balances to reflect the amount of revenue that will no longer be recognized in future periods for such contracts: an increase in unbilled receivables (included in trade receivables, net) of $24.8 million, an increase in contract assets (included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion) of $46.4 million and a decrease in deferred revenue of $52.8 million, with corresponding adjustments to retained earnings.

• We recorded an increase to our opening deferred income tax liability of $82.8 million, with a corresponding adjustment to retained earnings, to record the tax effect of the above adjustments.

• Further, we had other impacts to various accounts which resulted to an immaterial net reduction to our retained earnings.

Adoption of the new revenue standard impacted our condensed consolidated statement of income for the three months ended August 30, 2019 as follows:

(in thousands, except per share amounts)	As reported		Adjustments			Balances without ASC 606 adoption impact
Revenue
Subscription	$	2,546,571	$	825		$	2,547,396
Product	157,321		(32,908		)	124,413
Services and support	130,234		(3,499		)	126,735
Total revenue	2,834,126		(35,582		)	2,798,544
Operating expenses
Sales and marketing	812,314		7,211			819,525
Provision for income taxes	41,725		(2,140		)	39,585
Net income	$	792,763	$	(40,653	)	$	752,110
Basic net income per share	$	1.63	$	(0.08	)	$	1.55
Diluted net income per share	$	1.61	$	(0.08	)	$	1.53

10

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Adoption of the new revenue standard impacted our condensed consolidated statement of income for the nine months ended August 30, 2019 as follows:

(in thousands, except per share amounts)	As reported		Adjustments			Balances without ASC 606 adoption impact
Revenue
Subscription	$	7,307,635	$	(3,412	)	$	7,304,223
Product	480,691		(74,936		)	405,755
Services and support	391,026		(4,574		)	386,452
Total revenue	8,179,352		(82,922		)	8,096,430
Operating expenses
Sales and marketing	2,442,759		24,147