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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 3, 2023
 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                   to                   
 
Commission File Number: 0-15175
 
ADOBE INC.
(Exact name of registrant as specified in its charter)
________________________________
Delaware77-0019522
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.0001 par value per shareADBENASDAQ
________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   No
As of March 24, 2023, 458.7 million shares of the registrant’s common stock, $0.0001 par value per share, were issued and outstanding.



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

PART I—FINANCIAL INFORMATION
 
Item 1.

 

 



 

 

Item 2.

Item 3.

Item 4.


 PART II—OTHER INFORMATION
 
Item 1.

Item 1A.

Item 2.

Item 4.

Item 5.

Item 6.





 
2

Table of Contents
PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except par value)
 March 3,
2023
December 2,
2022
(Unaudited)(*)
ASSETS
Current assets:  
Cash and cash equivalents$4,072 $4,236 
Short-term investments1,581 1,860 
Trade receivables, net of allowances for doubtful accounts of $17 and $23, respectively
1,801 2,065 
Prepaid expenses and other current assets888 835 
Total current assets8,342 8,996 
Property and equipment, net1,967 1,908 
Operating lease right-of-use assets, net402 407 
Goodwill12,792 12,787 
Other intangibles, net1,354 1,449 
Deferred income taxes826 777 
Other assets984 841 
Total assets$26,667 $27,165 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:  
Trade payables$308 $379 
Accrued expenses1,469 1,790 
Debt 500 
Deferred revenue5,357 5,297 
Income taxes payable222 75 
Operating lease liabilities81 87 
Total current liabilities7,437 8,128 
Long-term liabilities: 
Debt3,630 3,629 
Deferred revenue120 117 
Income taxes payable536 530 
Operating lease liabilities415 417 
Other liabilities323 293 
Total liabilities12,461 13,114 
Stockholders’ equity: 
Preferred stock, $0.0001 par value; 2 shares authorized; none issued
  
Common stock, $0.0001 par value; 900 shares authorized; 601 shares issued; 
459 and 462 shares outstanding, respectively
  
Additional paid-in-capital10,284 9,868 
Retained earnings29,435 28,319 
Accumulated other comprehensive income (loss)(307)(293)
Treasury stock, at cost (142 and 139 shares, respectively)
(25,206)(23,843)
Total stockholders’ equity14,206 14,051 
Total liabilities and stockholders’ equity$26,667 $27,165 
_________________________________________
(*)    The condensed consolidated balance sheet as of December 2, 2022 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.
See accompanying notes to condensed consolidated financial statements.
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ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
 Three Months Ended
 March 3,
2023
March 4,
2022
Revenue: 
Subscription$4,373 $3,958 
Product120 145 
Services and other162 159 
Total revenue4,655 4,262 
 
Cost of revenue:
Subscription434 393 
Product8 10 
Services and other126 109 
Total cost of revenue568 512 
Gross profit4,087 3,750 
 
Operating expenses:
Research and development827 701 
Sales and marketing1,301 1,158 
General and administrative331 269 
Amortization of intangibles42 42 
Total operating expenses2,501 2,170 
 Operating income1,586 1,580 
 
Non-operating income (expense):
Interest expense(32)(28)
Investment gains (losses), net1 (9)
Other income (expense), net43  
Total non-operating income (expense), net12 (37)
Income before income taxes1,598 1,543 
Provision for income taxes351 277 
Net income$1,247 $1,266 
Basic net income per share$2.72 $2.68 
Shares used to compute basic net income per share459 473 
Diluted net income per share$2.71 $2.66 
Shares used to compute diluted net income per share460 475 


See accompanying notes to condensed consolidated financial statements.

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ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
Three Months Ended
 March 3,
2023
March 4,
2022
Increase/(Decrease)
Net income$1,247 $1,266 
Other comprehensive income (loss), net of taxes:
Available-for-sale securities:
Unrealized gains / losses on available-for-sale securities7 (14)
Derivatives designated as hedging instruments:
Unrealized gains / losses on derivative instruments
(9)23 
Reclassification adjustment for realized gains / losses on derivative instruments(16)(15)
Net increase (decrease) from derivatives designated as hedging instruments(25)8 
Foreign currency translation adjustments4 (34)
Other comprehensive income (loss), net of taxes(14)(40)
Total comprehensive income, net of taxes$1,233 $1,226 


See accompanying notes to condensed consolidated financial statements.


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ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
(Unaudited)
Three Months Ended March 3, 2023
 
  Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
 Treasury Stock 
 SharesAmountSharesAmountTotal
Balances at December 2, 2022
601 $ $9,868 $28,319 $(293)(139)$(23,843)$14,051 
Net income— — — 1,247 — — — 1,247 
Other comprehensive income (loss),
net of taxes
— — — — (14)— — (14)
Re-issuance of treasury stock under stock compensation plans
— —  (131)— 2 36 (95)
Repurchases of common stock— — — — — (5)(1,400)(1,400)
Stock-based compensation— — 416 — — — — 416 
Value of shares in deferred compensation plan
— — — — — — 1 1 
Balances at March 3, 2023
601 $ $10,284 $29,435 $(307)(142)$(25,206)$14,206 



Three Months Ended March 4, 2022
 
  Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
 Treasury Stock 
 SharesAmountSharesAmountTotal
Balances at December 3, 2021
601 $ $8,428 $23,905 $(137)(126)$(17,399)$14,797 
Net income
— — — 1,266 — — — 1,266 
Other comprehensive income (loss),
net of taxes
— — — — (40)— — (40)
Re-issuance of treasury stock under stock compensation plans
— —  (210)— 1 35 (175)
Repurchases of common stock— — — — — (4)(2,400)(2,400)
Stock-based compensation— — 322 — — — — 322 
Value of shares in deferred compensation plan
— — — — — — 5 5 
Balances at March 4, 2022
601 $ $8,750 $24,961 $(177)(129)$(19,759)$13,775 


See accompanying notes to condensed consolidated financial statements.
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ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 Three Months Ended
 March 3,
2023
March 4,
2022
Cash flows from operating activities:  
Net income$1,247 $1,266 
Adjustments to reconcile net income to net cash provided by operating activities: 
Depreciation, amortization and accretion212 213 
Stock-based compensation416 322 
Reduction of operating lease right-of-use assets21 22 
Deferred income taxes(49)129 
Unrealized losses (gains) on investments, net3 17 
Other non-cash items(5)2 
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Trade receivables, net269 191 
Prepaid expenses and other assets(258)(187)
Trade payables(55)6 
Accrued expenses and other liabilities(323)(389)
Income taxes payable152 36 
Deferred revenue63 141 
Net cash provided by operating activities1,693 1,769 
Cash flows from investing activities:  
Purchases of short-term investments (288)
Maturities of short-term investments254 208 
Proceeds from sales of short-term investments33 54 
Acquisitions, net of cash acquired (106)
Purchases of property and equipment(101)(100)
Purchases of long-term investments, intangibles and other assets(30)(28)
Net cash provided by (used for) investing activities156 (260)
Cash flows from financing activities:  
Repurchases of common stock(1,400)(2,400)
Proceeds from re-issuance of treasury stock69 91 
Taxes paid related to net share settlement of equity awards(164)(266)
Repayment of debt(500) 
Other financing activities, net(19)(29)
Net cash used for financing activities(2,014)(2,604)
Effect of foreign currency exchange rates on cash and cash equivalents1 (10)
Net change in cash and cash equivalents(164)(1,105)
Cash and cash equivalents at beginning of period4,236 3,844 
Cash and cash equivalents at end of period$4,072 $2,739 
Supplemental disclosures: 
Cash paid for income taxes, net of refunds$214 $59 
Cash paid for interest$55 $50 


See accompanying notes to condensed consolidated financial statements.
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ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 2, 2022 on file with the SEC (our “Annual Report”).
Use of Estimates
In preparing the condensed consolidated financial statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC, we must make estimates and judgments that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ materially from these estimates.
Significant Accounting Policies
There have been no material changes to our significant accounting policies as compared to the significant accounting policies described in our Annual Report.
Adopted Accounting Guidance and Accounting Pronouncements Not Yet Effective
There have been no recent accounting pronouncements, changes in accounting pronouncements or recently adopted accounting guidance during the three months ended March 3, 2023 that are of significance or potential significance to us.
NOTE 2.  REVENUE
Segment Information
Our segment results for the three months ended March 3, 2023 and March 4, 2022 were as follows:
(dollars in millions)Digital
Media
Digital
Experience
Publishing and
Advertising
Total
Three months ended March 3, 2023
Revenue$3,395 $1,176 $84 $4,655 
Cost of revenue142 404 22 568 
Gross profit$3,253 $772 $62 $4,087 
Gross profit as a percentage of revenue96 %66 %74 %88 %
Three months ended March 4, 2022
Revenue$3,110 $1,057 $95 $4,262 
Cost of revenue134 352 26 512 
Gross profit$2,976 $705 $69 $3,750 
Gross profit as a percentage of revenue96 %67 %73 %88 %
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ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
Revenue by geographic area for the three months ended March 3, 2023 and March 4, 2022 were as follows:
(in millions)20232022
Americas $2,779 $2,446 
EMEA1,173 1,136 
APAC703 680 
Total$4,655 $4,262 
Revenue by major offerings in our Digital Media reportable segment for the three months ended March 3, 2023 and March 4, 2022 were as follows:
(in millions)20232022
Creative Cloud$2,761 $2,548 
Document Cloud634 562 
Total Digital Media revenue$3,395 $3,110 
Subscription revenue by segment for the three months ended March 3, 2023 and March 4, 2022 were as follows:
(in millions)20232022
Digital Media $3,301 $2,995 
Digital Experience1,042 932 
Publishing and Advertising30 31 
Total subscription revenue$4,373 $3,958 
Contract Balances
A receivable is recorded when an unconditional right to invoice and receive payment exists, such that only the passage of time is required before payment of consideration is due. Included in trade receivables on the condensed consolidated balance sheets are unbilled receivable balances which have not yet been invoiced, and are typically related to license revenue or services which are delivered prior to invoicing. As of March 3, 2023, the balance of trade receivables, net of allowances for doubtful accounts, was $1.80 billion, inclusive of unbilled receivables of $101 million. As of December 2, 2022, the balance of trade receivables, net of allowances for doubtful accounts, was $2.07 billion, inclusive of unbilled receivables of $93 million.
We maintain an allowance for doubtful accounts which reflects our best estimate of potentially uncollectible trade receivables and is based on both specific and general reserves. We maintain general reserves on a collective basis by considering factors such as historical experience, credit-worthiness, the age of the trade receivable balances, current economic conditions and a reasonable and supportable forecast of future economic conditions. The allowance for doubtful accounts was $17 million and $23 million as of March 3, 2023 and December 2, 2022, respectively.
A contract asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract assets are included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion on the condensed consolidated balance sheets. We regularly review contract asset balances for impairment, considering factors such as historical experience, credit-worthiness, age of the balance, current economic conditions and a reasonable and supportable forecast of future economic conditions. Contract asset impairments were not material for the three months ended March 3, 2023. Contract assets were $82 million and $97 million as of March 3, 2023 and December 2, 2022, respectively.
Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services, including non-cancellable and non-refundable committed funds and refundable customer deposits. Deferred revenue is recognized as revenue when transfer of control to customers has occurred. As of March 3, 2023, the balance of deferred revenue was $5.48 billion, which includes $79 million of refundable customer deposits. Arrangements with some of our enterprise customers with non-cancellable and non-refundable committed funds provide options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services. Non-
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ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
cancellable and non-refundable committed funds related to these agreements comprised approximately 5% of the total deferred revenue.
As of December 2, 2022, the balance of deferred revenue was $5.41 billion. During the three months ended March 3, 2023, approximately $2.31 billion of revenue was recognized that was included in the balance of deferred revenue as of December 2, 2022.
Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and unbilled amounts that will be recognized as revenue in future periods. As of March 3, 2023, remaining performance obligations were approximately $15.21 billion. Non-cancellable and non-refundable funds related to some of our enterprise customer agreements referred to in the paragraph above comprised approximately 5% of the total remaining performance obligations. Approximately 73% of the remaining performance obligations, excluding the aforementioned enterprise customer agreements, are expected to be recognized over the next 12 months with the remainder recognized thereafter.
Incremental costs of obtaining a contract with a customer are capitalized if we expect the benefit of those costs to be longer than one year and primarily relate to sales commissions paid to our sales force personnel. Capitalized contract acquisition costs are included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion on the condensed consolidated balance sheets. Capitalized contract acquisition costs were $656 million and $629 million as of March 3, 2023 and December 2, 2022, respectively.
We record refund liabilities for amounts that may be subject to future refunds, which include sales returns reserves and customer rebates and credits. Refund liabilities are included in accrued expenses on the condensed consolidated balance sheets. Refund liabilities were $103 million and $106 million as of March 3, 2023 and December 2, 2022, respectively.
NOTE 3.  ACQUISITIONS
Figma
On September 15, 2022, we entered into a definitive agreement under which we intend to acquire Figma, Inc. (“Figma”) for approximately $20 billion, comprised of approximately half cash and half stock, subject to customary purchase price adjustments. Approximately 6 million additional restricted stock units will be granted to Figma’s Chief Executive Officer and employees that will vest over four years subsequent to closing. The transaction is subject to regulatory approvals and customary closing conditions, and is expected to close in 2023. We will be required to pay Figma a reverse termination fee of $1 billion if the transaction fails to receive regulatory clearance, assuming all other closing conditions have been satisfied or waived, or if it fails to close within 18 months from September 15, 2022.
Figma is a privately held company that provides a web-first collaborative product design platform. Following the closing, we intend to integrate Figma into our Digital Media reportable segment for financial reporting purposes.
NOTE 4.  CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of highly liquid marketable securities with remaining maturities of three months or less at the date of purchase. We classify our investments in marketable debt securities as “available-for-sale.” We carry these investments at fair value, based on quoted market prices or other readily available market information. Unrealized gains and unrealized non-credit-related losses of marketable debt securities are included in accumulated other comprehensive income, net of taxes, in our condensed consolidated balance sheets. Unrealized credit-related losses are recorded to other income (expense), net in our condensed consolidated statements of income with a corresponding allowance for credit-related losses in our condensed consolidated balance sheets. Gains and losses are determined using the specific identification method and recognized when realized in our condensed consolidated statements of income.
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ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
Cash, cash equivalents and short-term investments consisted of the following as of March 3, 2023:
(in millions)Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
Current assets:    
Cash$607 $ $ $607 
Cash equivalents:
Money market funds3,440   3,440 
Time deposits25   25 
Total cash equivalents3,465   3,465 
Total cash and cash equivalents4,072   4,072 
Short-term fixed income securities:
Asset-backed securities65  (1)64 
Corporate debt securities1,073  (17)1,056 
Municipal securities19   19 
U.S. agency securities36  (1)35 
U.S. Treasury securities422  (15)407 
Total short-term investments1,615  (34)1,581 
Total cash, cash equivalents and short-term investments$5,687 $ $(34)$5,653 
Cash, cash equivalents and short-term investments consisted of the following as of December 2, 2022:
(in millions)Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
Current assets:    
Cash$657 $ $ $657 
Cash equivalents:  
Corporate debt securities39   39 
Money market funds3,479   3,479 
Time deposits61   61 
Total cash equivalents3,579   3,579 
Total cash and cash equivalents4,236   4,236 
Short-term fixed income securities: 
Asset-backed securities98  (1)97 
Corporate debt securities1,290  (24)1,266 
Foreign government securities5   5 
Municipal securities24   24 
U.S. agency securities34   34 
U.S. Treasury securities450  (16)434 
Total short-term investments1,901  (41)1,860 
Total cash, cash equivalents and short-term investments$6,137 $ $(41)$6,096 

See Note 5 for further information regarding the fair value of our financial instruments.
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ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
The following table summarizes the estimated fair value of short-term fixed income debt securities classified as short-term investments based on stated effective maturities as of March 3, 2023:
(in millions)Estimated
Fair Value
Due within one year$906 
Due between one and two years528 
Due between two and three years145 
Due after three years2 
Total$1,581 

We review our debt securities classified as short-term investments on a regular basis for impairment. For debt securities in unrealized loss positions, we determine whether any portion of the decline in fair value below the amortized cost basis is due to credit-related factors if we neither intend to sell nor anticipate that it is more likely than not that we will be required to sell prior to recovery of the amortized cost basis. We consider factors such as the extent to which the market value has been less than the cost, any noted failure of the issuer to make scheduled payments, changes to the rating of the security and other relevant credit-related factors in determining whether or not a credit loss exists. During the three months ended March 3, 2023 and March 4, 2022, we did not recognize an allowance for credit-related losses on any of our investments.
NOTE 5.  FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The fair value of our financial assets and liabilities at March 3, 2023 was determined using the following inputs:
(in millions)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 funds$3,440 $3,440 $ $ 
Time deposits25 25   
Short-term investments:
Asset-backed securities64  64  
Corporate debt securities1,056  1,056  
Municipal securities19  19  
U.S. agency securities35  35  
U.S. Treasury securities407  407  
Prepaid expenses and other current assets:   
Foreign currency derivatives46  46  
Other assets: 
Deferred compensation plan assets186 186   
Total assets$5,278 $3,651 $1,627 $ 
Liabilities:    
Accrued expenses:    
Foreign currency derivatives$7 $ $7 $ 
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ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
The fair value of our financial assets and liabilities at December 2, 2022 was determined using the following inputs:
(in millions)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 debt securities$39 $ $39 $ 
Money market funds 3,479 3,479   
Time deposits61 61   
Short-term investments: 
Asset-backed securities97  97  
Corporate debt securities1,266  1,266  
Foreign government securities5  5  
Municipal securities24  24  
U.S. agency securities34  34  
U.S. Treasury securities 434  434  
Prepaid expenses and other current assets:    
Foreign currency derivatives51  51  
Other assets:    
Deferred compensation plan assets160 160   
Total assets$5,650 $3,700 $1,950 $ 
Liabilities:    
Accrued expenses:    
Foreign currency derivatives$15 $ $15 $ 
See Note 4 for further information regarding the fair value of our financial instruments. 
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 funds, time deposits and deferred compensation plan assets, which consist of money market and other mutual funds, are based on quoted prices in active markets at the measurement date.
Our over-the-counter foreign currency 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 other current financial assets and current financial liabilities have fair values that approximate their carrying values.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The fair value of our senior notes was $3.33 billion as of March 3, 2023, based on observable market prices in less active markets and categorized as Level 2. See Note 14 for further details regarding our debt.
NOTE 6.  DERIVATIVE FINANCIAL INSTRUMENTS
We may use derivatives to partially offset our business exposure to foreign currency and interest rate risk on expected future cash flows and certain existing assets and liabilities. We do not use any of our derivative instruments for trading purposes.
We enter into master netting arrangements to mitigate credit risk in derivative transactions by permitting net settlement of transactions with the same counterparty. We do not offset fair value amounts recognized for derivative instruments under master netting arrangements. We also enter into collateral security agreements with certain of our counterparties to exchange cash collateral when the net fair value of certain derivative instruments fluctuates from contractually established thresholds.
Cash Flow Hedges
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 and forward contracts to hedge a portion of our forecasted foreign currency denominated revenue and expenses. These foreign exchange contracts, carried at fair value, have maturities of up to 12 months.
In June 2019, we entered into Treasury lock agreements with large financial institutions which fixed benchmark U.S. Treasury rates for an aggregate notional amount of $1 billion of our future debt issuance. These derivative instruments hedged the impact of changes in the benchmark interest rate to future interest payments and were settled upon debt issuance in the first quarter of fiscal 2020. We incurred a loss related to the settlement of the instruments which is amortized to interest expense over the term of our debt due February 1, 2030. See Note 14 for further details regarding our debt.
As of March 3, 2023, we had net derivative gains on our foreign exchange option contracts expected to be recognized within the next 18 months, of which $15 million of gains are expected to be recognized into revenue within the next 12 months. In addition, we had net derivative losses on our foreign exchange forward contracts, of which $1 million of losses are expected to be recognized into operating expenses within the next 12 months, and net derivative losses on our Treasury lock agreements, of which $5 million is expected to be recognized into interest expense within the next 12 months.
Non-Designated Hedges
Our derivatives not designated as hedging instruments consist of foreign currency forward contracts that we primarily use to hedge monetary assets and liabilities denominated in non-functional currencies.
Fair value asset derivatives are included in prepaid expenses and other current assets and fair value liability derivatives are included in accrued expenses on our condensed consolidated balance sheets. The fair value of derivative instruments as of March 3, 2023 and December 2, 2022 were as follows:
(in millions)20232022
 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$41 $ $36 $ 
Foreign exchange forward contracts 1  7 
Derivatives not designated as hedging instruments:
 Foreign exchange forward contracts5 6 15 8 
Total derivatives$46 $7 $51 $15 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
Gains and losses on derivative instruments, net of tax, recognized in our condensed consolidated statements of comprehensive income for the three months ended March 3, 2023 and March 4, 2022 were primarily associated with our foreign exchange option contracts. For the three months ended March 3, 2023 and March 4, 2022, we recognized $13 million of net losses and $23 million of net gains, respectively, in our condensed consolidated statements of comprehensive income from our foreign exchange option contracts.
The effects of derivative instruments on our condensed consolidated statements of income for the three months ended March 3, 2023 and March 4, 2022 were primarily associated with foreign exchange option contracts. For the three months ended March 3, 2023 and March 4, 2022, we reclassified $18 million and $16 million of net gains, respectively, from accumulated other comprehensive income into revenue resulting from our foreign exchange option contracts.
NOTE 7.  GOODWILL AND OTHER INTANGIBLES
Goodwill as of March 3, 2023 and December 2, 2022 was $12.79 billion for both periods presented.
Other intangible assets subject to amortization as of March 3, 2023 and December 2, 2022 were as follows: 
(in millions)20232022
 Gross Carrying AmountAccumulated AmortizationNetGross Carrying AmountAccumulated AmortizationNet
Customer contracts and relationships$1,203 $(526)$677 $1,204 $(495)$709 
Purchased technology1,060 (583)477 1,060 (530)530 
Trademarks376 (183)193 375 (172)203 
Other20 (13)7 61 (54)7 
Other intangibles, net
$2,659 $(1,305)$1,354 $2,700 $(1,251)$1,449 
Amortization expense related to other intangibles was $96 million and $101 million for the three months ended March 3, 2023 and March 4, 2022, respectively. Of these amounts, $54 million and $59 million were included in cost of revenue for the three months ended March 3, 2023 and March 4, 2022, respectively.
As of March 3, 2023, the estimated aggregate amortization expense in future periods was as follows:
  (in millions)
Fiscal Year
Other Intangibles (1)
Remainder of 2023$281 
2024331 
2025295 
2026142 
2027104 
Thereafter182 
Total expected amortization expense$1,335 
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(1)Excludes capitalized in-process research and development which is considered indefinite lived until the completion or abandonment of the associated research and development efforts.
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NOTE 8.  ACCRUED EXPENSES
Accrued expenses as of March 3, 2023 and December 2, 2022 consisted of the following:
(in millions)20232022
Accrued compensation and benefits$525 $485 
Accrued bonuses158 489 
Accrued corporate marketing134 154 
Taxes payable111 117 
Refund liabilities103 106 
Other438 439 
Accrued expenses$1,469 $1,790 
Other primarily includes general corporate accruals for local and regional expenses, derivative collateral liabilities, accrued hosting fees and royalties payable.
NOTE 9.  STOCK-BASED COMPENSATION
Restricted Stock Units
Restricted stock unit activity for the three months ended March 3, 2023 was as follows:
Number of
Shares
(in millions)
Weighted Average
Grant Date
Fair Value
Aggregate
Fair Value(1)
(in millions)
Beginning outstanding balance7.4 $449.94 
Awarded4.1 $360.54 
Released(1.2)$445.73 
Forfeited(0.1)$461.85 
Ending outstanding balance10.2 $413.87 $3,506 
Expected to vest9.0 $414.72 $3,081 
_________________________________________
(1)    The aggregate fair value is calculated using the closing stock price as of March 3, 2023 of $344.04. 
The total fair value of restricted stock units vested during the three months ended March 3, 2023 was $423 million.
Performance Shares 
In the first quarter of fiscal 2023, the Executive Compensation Committee of our Board of Directors (the “ECC”) approved the 2023 Performance Share Program, the terms of which are similar to the 2022 Performance Share Program that is still outstanding. For information regarding our outstanding Performance Share Programs, including the terms, see “Note 12. Stock-Based Compensation” of our Annual Report on Form 10-K for the fiscal year ended December 2, 2022.
As of March 3, 2023, the shares awarded under our 2023, 2022 and 2021 Performance Share Programs remained outstanding and were yet to be earned. For information regarding our outstanding 2022 and 2021 Performance Share Programs, including the terms, see “Note 12. Stock-Based Compensation” of our Annual Report on Form 10-K for the fiscal year ended December 2, 2022.
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Performance share activity for the three months ended March 3, 2023 was as follows:
Number of
Shares
(in millions)
Weighted Average
Grant Date
Fair Value
Aggregate
Fair Value(1)
(in millions)
Beginning outstanding balance0.4 $495.23 
Awarded0.2 $437.52 
Released(0.1)$498.74 
Forfeited $497.45 
Ending outstanding balance0.5 $466.29 $169 
Expected to vest0.4 $466.54 $143 
_________________________________________
(1)    The aggregate fair value is calculated using the closing stock price as of March 3, 2023 of $344.04. 
Under our Performance Share Programs, participants generally have the ability to receive up to 200% of the target number of shares originally granted. Shares released during the three months ended March 3, 2023 resulted from 63% achievement of target for the 2020 Performance Share Program, as certified by the ECC in the first quarter of fiscal 2023.
The total fair value of performance shares vested during the three months ended March 3, 2023 was $39 million.
Employee Stock Purchase Plan Shares
Employees purchased 0.2 million shares at an average price of $286.05 and 0.2 million shares at an average price of $393.30 for the three months ended March 3, 2023 and March 4, 2022, respectively. The intrinsic value of shares purchased during the three months ended March 3, 2023 and March 4, 2022 was $12 million and $40 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.
Compensation Costs
As of March 3, 2023, there was $3.85 billion of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards and purchase rights which will be recognized over a weighted average period of 2.68 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 March 3, 2023 and March 4, 2022 were as follows:
 (in millions)20232022
Cost of revenue$29 $21 
Research and development209 161 
Sales and marketing122 93 
General and administrative56 47 
Total$416 $322 
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NOTE 10.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) and activity, net of related taxes, were as follows:
(in millions)December 2,
2022
Increase / DecreaseReclassification AdjustmentsMarch 3,
2023
Net unrealized gains / losses on available-for-sale securities$(41)$7 $ 
(1)
$(34)
Net unrealized gains / losses on derivative instruments designated as hedging instruments
17 (9)(16)
(2)
(8)
Cumulative foreign currency translation adjustments(269)4  (265)
Total accumulated other comprehensive income (loss), net of taxes
$(293)$2 $(16)$(307)
_________________________________________
(1)Reclassification adjustments for gains / losses on available-for-sale securities are classified in other income (expense), net.
(2)Reclassification adjustments for gains / losses on foreign currency hedges are classified in revenue or operating expenses, depending on the nature of the underlying transaction, and reclassification adjustments for gains / losses on Treasury lock hedges are classified in interest expense.
Taxes related to each component of other comprehensive income (loss) for the three months ended March 3, 2023 and March 4, 2022 were immaterial.
NOTE 11.  STOCK REPURCHASE PROGRAM
To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we may repurchase our shares in the open market or enter into structured repurchase agreements with third parties. In December 2020, our Board of Directors granted authority to repurchase up to $15 billion in our common stock through the end of fiscal 2024.
During the three months ended March 3, 2023 and March 4, 2022, we entered into accelerated share repurchase agreements (“ASRs”) with large financial institutions whereupon we provided them with prepayments of $1.4 billion and $2.4 billion, respectively. Under the terms of our ASRs, the financial institutions agree to deliver a portion of shares to us at contract inception and the remaining shares at settlement. The total number of shares delivered and average purchase price paid per share are determined upon settlement based on the Volume Weighted Average Price (“VWAP”) over the term of the ASR, less an agreed upon discount. At settlement, the financial institution may be required to deliver additional shares of our common stock to us or, under certain circumstances, we may be required to make a cash payment or deliver shares of our common stock to the financial institution, with the method of settlement at our election.
We also enter into structured stock repurchase agreements in which financial institutions agree to deliver shares to us at monthly intervals during the respective contract terms, and the number of shares delivered each month are determined based on the total notional amount of the contracts, the number of trading days in the intervals and the VWAP during the intervals, less an agreed upon discount.
During the three months ended March 3, 2023, we repurchased a total of 5.0 million shares, including approximately 1.8 million shares at an average price of $330.52 through a structured repurchase agreement entered into during fiscal 2022, as well as 3.2 million shares from the initial delivery of the ASR entered into during the three months ended March 3, 2023. During the three months ended March 4, 2022, we repurchased a total of 3.8 million shares, including approximately 0.6 million shares at an average price of $635.15 through a structured repurchase agreement entered into during fiscal 2021, as well as 3.2 million shares from the initial delivery of the ASR entered into during the three months ended March 4, 2022.
For the three months ended March 3, 2023, the prepayments were classified as treasury stock, a component of stockholders’ equity on our condensed consolidated balance sheets, at the payment date, though only shares physically delivered to us by March 3, 2023 were excluded from the computation of net income per share. As of March 3, 2023, a portion of the $1.4 billion prepayment under our outstanding ASR was evaluated as an unsettled forward contract indexed to our own
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stock, classified within stockholders’ equity. Subsequent to March 3, 2023, the outstanding ASR was settled which resulted in total repurchases of 4.0 million shares at an average purchase price of $348.46.
Subsequent to March 3, 2023, as part of the December 2020 stock repurchase authority, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $1 billion. Upon completion of the $1 billion stock repurchase agreement, $4.15 billion remains under our December 2020 authority.
NOTE 12.  NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share for the three months ended March 3, 2023 and March 4, 2022:
(in millions, except per share data)20232022
Net income$1,247 $1,266 
Shares used to compute basic net income per share459.0 472.6 
Dilutive potential common shares from stock plans and programs0.5 2.8 
Shares used to compute diluted net income per share459.5 475.4 
Basic net income per share$2.72 $2.68 
Diluted net income per share$2.71 $2.66 
Anti-dilutive potential common shares6.2 0.9 
NOTE 13.  COMMITMENTS AND CONTINGENCIES
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.
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In addition to intellectual property disputes, we are subject to legal proceedings, claims, including claims relating to commercial, employment and other matters, and investigations, including government investigations. Some of these disputes, legal proceedings and investigations 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 or 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 the Audit Committee of the Board of Directors.
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, results of operations or cash flows 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, results of operations or cash flows could be negatively affected in any particular period by the resolution of one or more of these counter-claims.
NOTE 14.  DEBT
The carrying value of our borrowings as of March 3, 2023 and December 2, 2022 were as follows:
 (dollars in millions)
Issuance DateDue DateEffective Interest Rate20232022
1.70% 2023 Notes
February 2020February 20231.92%$ $500 
1.90% 2025 Notes
February 2020February 20252.07%500 500 
3.25% 2025 Notes
January 2015February 20253.67%1,000 1,000 
2.15% 2027 Notes
February 2020February 20272.26%850 850 
2.30% 2030 Notes
February 2020February 20302.69%1,300 1,300 
Total debt outstanding, at par$3,650 $4,150 
Current portion of debt, at par (500)
Unamortized discount and debt issuance costs(20)(21)
Carrying value of long-term debt$3,630 $3,629 
Carrying value of current debt, net of unamortized discount and debt issuance costs$ $500 
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Senior Notes
In January 2015, we issued $1 billion of senior notes due February 1, 2025. The related discount and issuance costs are amortized to interest expense over the term of the notes using the effective interest method. Interest is payable semi-annually, in arrears, on February 1 and August 1.
In February 2020, we issued $500 million of senior notes due February 1, 2023, $500 million of senior notes due February 1, 2025, $850 million of senior notes due February 1, 2027 and $1.30 billion of senior notes due February 1, 2030. Our total proceeds of approximately $3.14 billion, net of issuance discount, were used for general corporate purposes including repayment of debt instruments due in fiscal 2020. The related discount and issuance costs are amortized to interest expense over the respective terms of the notes using the effective interest method. Interest is payable semi-annually, in arrears, on February 1 and August 1.