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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 2, 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 June 23, 2023, 455.8 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)
 June 2,
2023
December 2,
2022
(Unaudited)(*)
ASSETS
Current assets:  
Cash and cash equivalents$5,456 $4,236 
Short-term investments1,145 1,860 
Trade receivables, net of allowances for doubtful accounts of $17 and $23, respectively
1,685 2,065 
Prepaid expenses and other current assets988 835 
Total current assets9,274 8,996 
Property and equipment, net2,032 1,908 
Operating lease right-of-use assets, net389 407 
Goodwill12,796 12,787 
Other intangibles, net1,258 1,449 
Deferred income taxes964 777 
Other assets1,125 841 
Total assets$27,838 $27,165 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:  
Trade payables$346 $379 
Accrued expenses1,786 1,790 
Debt 500 
Deferred revenue5,265 5,297 
Income taxes payable548 75 
Operating lease liabilities74 87 
Total current liabilities8,019 8,128 
Long-term liabilities: 
Debt3,631 3,629 
Deferred revenue116 117 
Income taxes payable479 530 
Operating lease liabilities408 417 
Other liabilities347 293 
Total liabilities13,000 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; 
456 and 462 shares outstanding, respectively
  
Additional paid-in-capital10,717 9,868 
Retained earnings30,609 28,319 
Accumulated other comprehensive income (loss)(297)(293)
Treasury stock, at cost (145 and 139 shares, respectively)
(26,191)(23,843)
Total stockholders’ equity14,838 14,051 
Total liabilities and stockholders’ equity$27,838 $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.
3

Table of Contents
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
 Three Months EndedSix Months Ended
 June 2,
2023
June 3,
2022
June 2,
2023
June 3,
2022
Revenue: 
Subscription$4,517 $4,070 $8,890 $8,028 
Product130 146 250 291 
Services and other169 170 331 329 
Total revenue4,816 4,386 9,471 8,648 
 
Cost of revenue:
Subscription436 410 870 803 
Product8 9 16 19 
Services and other128 120 254 229 
Total cost of revenue572 539 1,140 1,051 
Gross profit4,244 3,847 8,331 7,597 
 
Operating expenses:
Research and development876 738 1,703 1,439 
Sales and marketing1,345 1,247 2,646 2,405 
General and administrative357 291 688 560 
Amortization of intangibles42 42 84 84 
Total operating expenses2,620 2,318 5,121 4,488 
 Operating income1,624 1,529 3,210 3,109 
 
Non-operating income (expense):
Interest expense(26)(28)(58)(56)
Investment gains (losses), net5 (8)6 (17)
Other income (expense), net47 (1)90 (1)
Total non-operating income (expense), net26 (37)38 (74)
Income before income taxes1,650 1,492 3,248 3,035 
Provision for income taxes355 314 706 591 
Net income$1,295 $1,178 $2,542 $2,444 
Basic net income per share$2.83 $2.50 $5.55 $5.17 
Shares used to compute basic net income per share458 472 458 472 
Diluted net income per share$2.82 $2.49 $5.54 $5.15 
Shares used to compute diluted net income per share459 473 459 474 


See accompanying notes to condensed consolidated financial statements.

4

Table of Contents
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
Three Months EndedSix Months Ended
 June 2,
2023
June 3,
2022
June 2,
2023
June 3,
2022
Increase/(Decrease)Increase/(Decrease)
Net income$1,295 $1,178 $2,542 $2,444 
Other comprehensive income (loss), net of taxes:
Available-for-sale securities:
Unrealized gains / losses on available-for-sale securities6 (15)14 (29)
Reclassification adjustment for recognized gains / losses on available-for-sale securities5  5  
Net increase (decrease) from available-for-sale securities11 (15)19 (29)
Derivatives designated as hedging instruments:
Unrealized gains / losses on derivative instruments
 63 (9)86 
Reclassification adjustment for realized gains / losses on derivative instruments(7)(28)(24)(43)
Net increase (decrease) from derivatives designated as hedging instruments(7)35 (33)43 
Foreign currency translation adjustments6 (38)10 (72)
Other comprehensive income (loss), net of taxes10 (18)(4)(58)
Total comprehensive income, net of taxes$1,305 $1,160 $2,538 $2,386 


See accompanying notes to condensed consolidated financial statements.


5

Table of Contents
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
(Unaudited)
Three Months Ended June 2, 2023
 Common StockAdditional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock 
 SharesAmountSharesAmountTotal
Balances at March 3, 2023
601 $ $10,284 $29,435 $(307)(142)$(25,206)$14,206 
Net income— — — 1,295 — — — 1,295 
Other comprehensive income (loss),
net of taxes
— — — — 10 — — 10 
Re-issuance of treasury stock under stock compensation plans
— — — (121)—  19 (102)
Repurchases of common stock— — — — — (3)(1,004)(1,004)
Stock-based compensation— — 433 — — — — 433 
Balances at June 2, 2023
601 $ $10,717 $30,609 $(297)(145)$(26,191)$14,838 



Three Months Ended June 3, 2022
 Common StockAdditional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock 
 SharesAmountSharesAmountTotal
Balances at March 4, 2022
601 $ $8,750 $24,961 $(177)(129)$(19,759)$13,775 
Net income
— — — 1,178 — — — 1,178 
Other comprehensive income (loss),
net of taxes
— — — — (18)— — (18)
Re-issuance of treasury stock under stock compensation plans
— — — (117)— 1 16 (101)
Repurchases of common stock— — — — — (2)(1,200)(1,200)
Stock-based compensation— — 352 — — — — 352 
Value of shares in deferred compensation plan— — — — — — (1)(1)
Balances at June 3, 2022
601 $ $9,102 $26,022 $(195)(130)$(20,944)$13,985 
6

Table of Contents
ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
(Unaudited)
Six Months Ended June 2, 2023
 Common StockAdditional
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— — — 2,542 — — — 2,542 
Other comprehensive income (loss),
net of taxes
— — — — (4)— — (4)
Re-issuance of treasury stock under stock compensation plans
— — — (252)— 2 55 (197)
Repurchases of common stock— — — — — (8)(2,404)(2,404)
Stock-based compensation— — 849 — — — — 849 
Value of shares in deferred compensation plan— — — — — — 1 1 
Balances at June 2, 2023
601 $ $10,717 $30,609 $(297)(145)$(26,191)$14,838 



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


See accompanying notes to condensed consolidated financial statements.
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ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 Six Months Ended
 June 2,
2023
June 3,
2022
Cash flows from operating activities:  
Net income$2,542 $2,444 
Adjustments to reconcile net income to net cash provided by operating activities: 
Depreciation, amortization and accretion432 425 
Stock-based compensation849 674 
Reduction of operating lease right-of-use assets36 42 
Deferred income taxes(168)197 
Unrealized losses (gains) on investments, net(2)27 
Other non-cash items(3)2 
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Trade receivables, net385 287 
Prepaid expenses and other assets(562)(140)
Trade payables(29)60 
Accrued expenses and other liabilities(36)(187)
Income taxes payable421 (20)
Deferred revenue(33)(2)
Net cash provided by operating activities3,832 3,809 
Cash flows from investing activities:  
Purchases of short-term investments (524)
Maturities of short-term investments538 349 
Proceeds from sales of short-term investments195 159 
Acquisitions, net of cash acquired (126)
Purchases of property and equipment(222)(226)
Purchases of long-term investments, intangibles and other assets(34)(30)
Proceeds from sale of long-term investments and other assets1  
Net cash provided by (used for) investing activities478 (398)
Cash flows from financing activities:  
Repurchases of common stock(2,400)(3,600)
Proceeds from re-issuance of treasury stock70 91 
Taxes paid related to net share settlement of equity awards(267)(367)
Repayment of debt(500) 
Other financing activities, net3 22 
Net cash used for financing activities(3,094)(3,854)
Effect of foreign currency exchange rates on cash and cash equivalents4 (36)
Net change in cash and cash equivalents1,220 (479)
Cash and cash equivalents at beginning of period4,236 3,844 
Cash and cash equivalents at end of period$5,456 $3,365 
Supplemental disclosures: 
Cash paid for income taxes, net of refunds$435 $260 
Cash paid for interest$56 $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 six months ended June 2, 2023 that are of significance or potential significance to us.
NOTE 2.  REVENUE
Segment Information
Our segment results for the three months ended June 2, 2023 and June 3, 2022 were as follows:
(dollars in millions)Digital
Media
Digital
Experience
Publishing and
Advertising
Total
Three months ended June 2, 2023
Revenue$3,511 $1,222 $83 $4,816 
Cost of revenue152 399 21 572 
Gross profit$3,359 $823 $62 $4,244 
Gross profit as a percentage of revenue96 %67 %75 %88 %
Three months ended June 3, 2022
Revenue$3,200 $1,095 $91 $4,386 
Cost of revenue141 374 24 539 
Gross profit$3,059 $721 $67 $3,847 
Gross profit as a percentage of revenue96 %66 %74 %88 %
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
Our segment results for the six months ended June 2, 2023 and June 3, 2022 were as follows:
(dollars in millions)Digital
Media
Digital
Experience
Publishing and
Advertising
Total
Six months ended June 2, 2023
Revenue$6,906 $2,398 $167 $9,471 
Cost of revenue294 803 43 1,140 
Gross profit$6,612 $1,595 $124 $8,331 
Gross profit as a percentage of revenue96 %67 %74 %88 %
Six months ended June 3, 2022
Revenue$6,310 $2,152 $186 $8,648 
Cost of revenue275 726 50 1,051 
Gross profit$6,035 $1,426 $136 $7,597 
Gross profit as a percentage of revenue96 %66 %73 %88 %
Revenue by geographic area for the three and six months ended June 2, 2023 and June 3, 2022 were as follows:
Three MonthsSix Months
(in millions)2023202220232022
Americas $2,879 $2,524 $5,658 $4,970 
EMEA1,213 1,157 2,386 2,293 
APAC724 705 1,427 1,385 
Total$4,816 $4,386 $9,471 $8,648 
Revenue by major offerings in our Digital Media reportable segment for the three and six months ended June 2, 2023 and June 3, 2022 were as follows:
Three MonthsSix Months
(in millions)2023202220232022
Creative Cloud$2,852 $2,605 $5,613 $5,153 
Document Cloud659 595 1,293 1,157 
Total Digital Media revenue$3,511 $3,200 $6,906 $6,310 
Subscription revenue by segment for the three and six months ended June 2, 2023 and June 3, 2022 were as follows:
Three MonthsSix Months
(in millions)2023202220232022
Digital Media $3,418 $3,079 $6,719 $6,074 
Digital Experience1,070 961 2,112 1,893 
Publishing and Advertising29 30 59 61 
Total subscription revenue$4,517 $4,070 $8,890 $8,028 
Contract Balances
A receivable is recorded when an unconditional right to invoice and receive payment exists, such that only the passage of time is required before payment of consideration is due. Included in trade receivables on the condensed consolidated balance sheets are unbilled receivable balances which have not yet been invoiced, and are typically related to license revenue or services which are delivered prior to invoicing. As of June 2, 2023, the balance of trade receivables, net of allowances for doubtful accounts, was $1.69 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.
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ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
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 June 2, 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 six months ended June 2, 2023. Contract assets were $119 million and $97 million as of June 2, 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 June 2, 2023, the balance of deferred revenue was $5.38 billion, which includes $52 million of refundable customer deposits. Arrangements with some of our enterprise customers with non-cancellable and non-refundable committed funds provide options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services. Non-cancellable and non-refundable committed funds related to these agreements comprised approximately 5% of the total deferred revenue.
As of December 2, 2022, the balance of deferred revenue was $5.41 billion. During the three and six months ended June 2, 2023, approximately $1.56 billion and $3.86 billion of revenue, respectively, 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 June 2, 2023, remaining performance obligations were approximately $15.22 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 72% 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 $668 million and $629 million as of June 2, 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 $85 million and $106 million as of June 2, 2023 and December 2, 2022, respectively.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
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 should 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.
Cash, cash equivalents and short-term investments consisted of the following as of June 2, 2023:
(in millions)Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
Current assets:    
Cash$638 $ $ $638 
Cash equivalents:
Money market funds4,794   4,794 
Time deposits24   24 
Total cash equivalents4,818   4,818 
Total cash and cash equivalents5,456   5,456 
Short-term fixed income securities:
Asset-backed securities42  (1)41 
Corporate debt securities714  (10)704 
Municipal securities11   11 
U.S. agency securities35   35 
U.S. Treasury securities365  (11)354 
Total short-term investments1,167  (22)1,145 
Total cash, cash equivalents and short-term investments$6,623 $ $(22)$6,601 
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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 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.
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 June 2, 2023:
(in millions)Estimated
Fair Value
Due within one year$708 
Due between one and two years371 
Due between two and three years63 
Due after three years3 
Total$1,145 

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 six months ended June 2, 2023 and June 3, 2022, we did not recognize an allowance for credit-related losses on any of our investments.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
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 June 2, 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$4,794 $4,794 $ $ 
Time deposits24 24   
Short-term investments:
Asset-backed securities41  41  
Corporate debt securities704  704  
Municipal securities11  11  
U.S. agency securities35  35  
U.S. Treasury securities354  354  
Prepaid expenses and other current assets:   
Foreign currency derivatives67  67  
Other assets: 
Deferred compensation plan assets190 190   
Total assets$6,220 $5,008 $1,212 $ 
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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ADOBE INC.

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 $3.38 billion as of June 2, 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 June 2, 2023, we had net derivative gains on our foreign exchange option contracts expected to be recognized within the next 18 months, of which $2 million of gains are expected to be recognized into revenue within the next 12 months. In addition, we had 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 June 2, 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$64 $ $36 $ 
Foreign exchange forward contracts   7 
Derivatives not designated as hedging instruments:
 Foreign exchange forward contracts3 7 15 8 
Total derivatives$67 $7 $51 $15 
Gains and losses on derivative instruments, net of tax, recognized in our condensed consolidated statements of comprehensive income for the three and six months ended June 2, 2023 and June 3, 2022 were primarily associated with our
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ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)
foreign exchange option contracts. For the three months ended June 2, 2023, net losses recognized in our condensed consolidated statements of comprehensive income from our foreign exchange option contracts were immaterial. For the six months ended June 2, 2023, we recognized $13 million of net losses in our condensed consolidated statements of comprehensive income from our foreign exchange option contracts. For the three and six months ended June 3, 2022, we recognized $63 million and $86 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 and six months ended June 2, 2023 and June 3, 2022 were primarily associated with foreign exchange option contracts. For the three and six months ended June 2, 2023, we reclassified $10 million and $31 million of net gains, respectively, from accumulated other comprehensive income into revenue resulting from our foreign exchange option contracts. Comparatively, for the three and six months ended June 3, 2022, we reclassified $33 million and $51 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 June 2, 2023 and December 2, 2022 was $12.80 billion and $12.79 billion, respectively. During the second quarter of fiscal 2023, we completed our annual goodwill impairment test associated with our reporting units and determined there was no impairment of goodwill.
Other intangible assets subject to amortization as of June 2, 2023 and December 2, 2022 were as follows: 
(in millions)20232022