ADOBE INC. (Form: 10-Q, Received: 06/26/2019 16:09:12)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________

FORM 10-Q

(Mark One)



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

For the quarterly period ended May 31, 2019



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

345 Park Avenue, San Jose, California 95110-2704

(Address of principal executive offices and zip code)

(408) 536-6000

(Registrant’s telephone number, including area code)

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	The NASDAQ Stock Market LLC (NASDAQ Global Select Market)

________________________________

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

Indicate by check mark whether the registrant has submitted electronically 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 x No o

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 x	Accelerated filer o	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o	Emerging growth company o

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

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

The number of shares outstanding of the registrant’s common stock as of June 21, 2019 was 485,438,762.

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 May 31, 2019 and November 30, 2018	3
	Condensed Consolidated Statements of Income Three and Six Months Ended May 31, 2019 and June 1, 2018	4
	Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended May 31, 2019 and June 1, 2018	5
	Condensed Consolidated Statements of Stockholders’ Equity Three and Six Months Ended May 31, 2019 and June 1, 2018	6
	Condensed Consolidated Statements of Cash Flows Six Months Ended May 31, 2019 and June 1, 2018	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	54
Item 4.	Controls and Procedures	54

PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	54
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

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)



	May 31, 2019			November 30, 2018
	(Unaudited)			(*)
ASSETS
Current assets:
Cash and cash equivalents	$	2,082,910		$	1,642,775
Short-term investments	1,396,069			1,586,187
Trade receivables, net of allowances for doubtful accounts of $12,379 and $14,981, respectively	1,272,668			1,315,578
Prepaid expenses and other current assets	590,998			312,499
Total current assets	5,342,645			4,857,039
Property and equipment, net	1,205,020			1,075,072
Goodwill	10,697,874			10,581,048
Purchased and other intangibles, net	1,917,149			2,069,001
Other assets	503,221			186,522
Total assets	$	19,665,909		$	18,768,682

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade payables	$	169,101		$	186,258
Accrued expenses	1,314,998			1,163,185
Debt	3,145,668			—
Income taxes payable	45,778			35,709
Deferred revenue	3,011,552			2,915,974
Total current liabilities	7,687,097			4,301,126
Long-term liabilities:
Debt	987,938			4,124,800
Deferred revenue	122,522			137,630
Income taxes payable	637,733			644,101
Deferred income taxes	133,886			46,702
Other liabilities	165,040			152,209
Total liabilities	9,734,216			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; 486,273 and 487,663 shares outstanding, respectively	61			61
Additional paid-in-capital	6,050,800			5,685,337
Retained earnings	13,183,938			11,815,597
Accumulated other comprehensive income (loss)	(144,364		)	(148,130		)
Treasury stock, at cost (114,561 and 113,171 shares, respectively), net of reissuances	(9,158,742		)	(7,990,751		)
Total stockholders’ equity	9,931,693			9,362,114
Total liabilities and stockholders’ equity	$	19,665,909		$	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.

See accompanying notes to condensed consolidated financial statements.

Table of Contents

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)



	Three Months Ended						Six Months Ended
	May 31, 2019			June 1, 2018			May 31, 2019			June 1, 2018
Revenue:
Subscription	$	2,456,097		$	1,923,131		$	4,761,064		$	3,716,489
Product	152,816			150,993			323,370			322,601
Services and support	135,367			121,236			260,792			235,217
Total revenue	2,744,280			2,195,360			5,345,226			4,274,307
Cost of revenue:
Subscription	296,476			186,355			584,507			351,040
Product	9,345			10,779			21,450			23,656
Services and support	101,667			84,210			198,817			165,550
Total cost of revenue	407,488			281,344			804,774			540,246
Gross profit	2,336,792			1,914,016			4,540,452			3,734,061
Operating expenses:
Research and development	475,958			374,128			940,595			722,897
Sales and marketing	848,927			646,215			1,630,445			1,227,172
General and administrative	219,334			178,040			435,443			348,480
Amortization of purchased intangibles	43,026			17,149			89,592			34,295
Total operating expenses	1,587,245			1,215,532			3,096,075			2,332,844
Operating income	749,547			698,484			1,444,377			1,401,217
Non-operating income (expense):
Interest and other income (expense), net	2,558			11,599			6,824			28,271
Interest expense	(40,577		)	(20,363		)	(81,170		)	(40,262		)
Investment gains (losses), net	(756		)	1,079			43,075			4,075
Total non-operating income (expense), net	(38,775		)	(7,685		)	(31,271		)	(7,916		)
Income before income taxes	710,772			690,799			1,413,106			1,393,301
Provision for income taxes	78,179			27,632			106,272			147,058
Net income	$	632,593		$	663,167		$	1,306,834		$	1,246,243
Basic net income per share	$	1.30		$	1.35		$	2.68		$	2.53
Shares used to compute basic net income per share	487,535			491,914			487,795			491,993
Diluted net income per share	$	1.29		$	1.33		$	2.65		$	2.50
Shares used to compute diluted net income per share	492,212			498,252			493,200			499,166

See accompanying notes to condensed consolidated financial statements.

Table of Contents

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)



	Three Months Ended						Six Months Ended
	May 31, 2019			June 1, 2018			May 31, 2019			June 1, 2018
	Increase/(Decrease)						Increase/(Decrease)
Net income	$	632,593		$	663,167		$	1,306,834		$	1,246,243
Other comprehensive income (loss), net of taxes:
Available-for-sale securities:
Unrealized gains / losses on available-for-sale securities	9,910			(1,721		)	22,312			(24,869		)
Reclassification adjustment for recognized gains / losses on available-for-sale securities	67			75			192			197
Net increase (decrease) from available-for-sale securities	9,977			(1,646		)	22,504			(24,672		)
Derivatives designated as hedging instruments:
Unrealized gains / losses on derivative instruments	16,765			31,104			8,308			29,767
Reclassification adjustment for recognized gains / losses on derivative instruments	(8,675		)	(37		)	(16,872		)	(2,177		)
Net increase (decrease) from derivatives designated as hedging instruments	8,090			31,067			(8,564		)	27,590
Foreign currency translation adjustments	(11,999		)	(48,712		)	(10,174		)	(20,327		)
Other comprehensive income (loss), net of taxes	6,068			(19,291		)	3,766			(17,409		)
Total comprehensive income, net of taxes	$	638,661		$	643,876		$	1,310,600		$	1,228,834

See accompanying notes to condensed consolidated financial statements.

Table of Contents

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)



	Three Months Ended May 31, 2019
	Common Stock			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock
	Shares	Amount		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Shares		Amount			Total
Balances at March 1, 2019	600,834	$	61	$	5,857,440	$	12,579,311		$	(150,432	)	(112,330	)	$	(8,414,895	)	$	9,871,485
Net income	—	—		—		632,593			—			—		—			632,593
Other comprehensive income (losses), net of taxes	—	—		—		—			6,068			—		—			6,068
Re-issuance of treasury stock under stock compensation plans	—	—		—		(27,966		)	—			224		6,153			(21,813		)
Purchase of treasury stock	—	—		—		—			—			(2,455	)	(750,000		)	(750,000		)
Stock-based compensation	—	—		193,360		—			—			—		—			193,360
Balances at May 31, 2019	600,834	$	61	$	6,050,800	$	13,183,938		$	(144,364	)	(114,561	)	$	(9,158,742	)	$	9,931,693



	Three Months Ended June 1, 2018
	Common Stock			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock
	Shares	Amount		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Shares		Amount			Total
Balances at March 2, 2018	600,834	$	61	$	5,208,588	$	9,830,399		$	(109,939	)	(107,954	)	$	(6,295,081	)	$	8,634,028
Net income	—	—		—		663,167			—			—		—			663,167
Other comprehensive income (losses), net of taxes	—	—		—		—			(19,291		)	—		—			(19,291		)
Re-issuance of treasury stock under stock compensation plans	—	—		—		(22,500		)	—			194		5,646			(16,854		)
Purchase of treasury stock	—	—		—		—			—			(2,639	)	(700,000		)	(700,000		)
Stock-based compensation	—	—		145,587		—			—			—		—			145,587
Value of shares in deferred compensation plan	—	—		—		—			—			—		(1,054		)	(1,054		)
Balances at June 1, 2018	600,834	$	61	$	5,354,175	$	10,471,066		$	(129,230	)	(110,399	)	$	(6,990,489	)	$	8,705,583

Table of Contents

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

(In thousands)

(Unaudited)



	Six Months Ended May 31, 2019
	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock
	Shares	Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			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	—	—		—			1,306,834			—			—		—			1,306,834
Other comprehensive income (losses), net of taxes	—	—		—			—			3,766			—		—			3,766
Re-issuance of treasury stock under stock compensation plans	—	—		(8,008		)	(380,812		)	—			3,135		86,026			(302,794		)
Purchase of treasury stock	—	—		—			—			—			(4,525	)	(1,250,000		)	(1,250,000		)
Stock-based compensation	—	—		373,471			—			—			—		—			373,471
Value of shares in deferred compensation plan	—	—		—			—			—			—		(4,017		)	(4,017		)
Balances at May 31, 2019	600,834	$	61	$	6,050,800		$	13,183,938		$	(144,364	)	(114,561	)	$	(9,158,742	)	$	9,931,693



	Six Months Ended June 1, 2018
	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock
	Shares	Amount		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			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	—	—		—			1,246,243			—			—		—			1,246,243
Other comprehensive income (losses), net of taxes	—	—		—			—			(17,409		)	—		—			(17,409		)
Re-issuance of treasury stock under stock compensation plans	—	—		(9,133		)	(348,729		)	—			3,439		100,039			(257,823		)
Purchase of treasury stock	—	—		—			—			—			(4,266	)	(1,000,000		)	(1,000,000		)
Stock-based compensation	—	—		281,113			—			—			—		—			281,113
Value of shares in deferred compensation plan	—	—		—			—			—			—		(6,092		)	(6,092		)
Impacts of the U.S. Tax Cut and Jobs Act	—	—		—			(318		)	—			—		—			(318		)
Balances at June 1, 2018	600,834	$	61	$	5,354,175		$	10,471,066		$	(129,230	)	(110,399	)	$	(6,990,489	)	$	8,705,583

See accompanying notes to condensed consolidated financial statements.

Table of Contents

ADOBE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended
	May 31, 2019			June 1, 2018
Cash flows from operating activities:
Net income	$	1,306,834		$	1,246,243
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	290,508			152,882
Stock-based compensation	388,987			280,902
Deferred income taxes	(10,682		)	(400,069		)
Unrealized losses (gains) on investments, net	(39,978		)	(1,502		)
Other non-cash items	1,970			3,623
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Trade receivables, net	85,683			140,681
Prepaid expenses and other assets	(142,520		)	(106,612		)
Trade payables	(17,269		)	3,656
Accrued expenses	116,994			46,535
Income taxes payable	11,929			459,943
Deferred revenue	130,320			139,725
Net cash provided by operating activities	2,122,776			1,966,007
Cash flows from investing activities:
Purchases of short-term investments	(139,346		)	(412,746		)
Maturities of short-term investments	320,629			352,078
Proceeds from sales of short-term investments	29,473			200,458
Acquisitions, net of cash acquired	(99,817		)	(14,614		)
Purchases of property and equipment	(210,760		)	(140,458		)
Purchases of long-term investments, intangibles and other assets	(23,680		)	(13,698		)
Proceeds from sale of long-term investments and other assets	1,656			2,897
Net cash used for investing activities	(121,845		)	(26,083		)
Cash flows from financing activities:
Purchases of treasury stock	(1,250,000		)	(1,000,000		)
Proceeds from issuance of treasury stock	73,912			64,682
Taxes paid related to net share settlement of equity awards	(376,706		)	(322,505		)
Repayment of capital lease obligations	(3,219		)	(815		)
Net cash used for financing activities	(1,556,013		)	(1,258,638		)
Effect of foreign currency exchange rates on cash and cash equivalents	(4,783		)	628
Net increase in cash and cash equivalents	440,135			681,914
Cash and cash equivalents at beginning of period	1,642,775			2,306,072
Cash and cash equivalents at end of period	$	2,082,910		$	2,987,986
Supplemental disclosures:
Cash paid for income taxes, net of refunds	$	107,938		$	73,508
Cash paid for interest	$	78,006		$	37,503

See accompanying notes to condensed consolidated financial statements.

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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”).

Reclassifications

Certain immaterial prior year amounts have been reclassified to conform to current year presentation in the condensed consolidated statements of cash flows.

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, 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

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(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 three months ended May 31, 2019 as follows (in thousands, except per share amounts):



	As reported		Adjustments			Balances without ASC 606 adoption impact
Revenue
Subscription	$	2,456,097	$	(6,444	)	$	2,449,653
Product	152,816		(19,148		)	133,668
Services and support	135,367		(304		)	135,063
Total revenue	2,744,280		(25,896		)	2,718,384
Operating expenses
Sales and marketing	848,927		8,068			856,995
Provision for income taxes	78,179		(3,747		)	74,432
Net income	$	632,593	$	(30,370	)	$	602,223
Basic net income per share	$	1.30	$	(0.06	)	$	1.24
Diluted net income per share	$	1.29	$	(0.07	)	$	1.22

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Adoption of the new revenue standard impacted our condensed consolidated statement of income for six months ended May 31, 2019 as follows (in thousands, except per share amounts):



	As reported		Adjustments			Balances without ASC 606 adoption impact
Revenue
Subscription	$	4,761,064	$	(4,237	)	$	4,756,827
Product	323,370		(42,028		)	281,342
Services and support	260,792		(1,075		)	259,717
Total revenue	5,345,226		(47,340		)	5,297,886
Operating expenses
Sales and marketing	1,630,445		16,936			1,647,381
Provision for income taxes	106,272		(4,957		)	101,315
Net income	$	1,306,834	$	(59,423	)	$	1,247,411
Basic net income per share	$	2.68	$	(0.12	)	$	2.56
Diluted net income per share	$	2.65	$	(0.12	)	$	2.53

Adoption of the new revenue standard impacted our condensed consolidated balance sheets as of May 31, 2019 as follows (in thousands):



	As reported		Adjustments			Balances without ASC 606 adoption impact
Assets
Trade receivables, net of allowances for doubtful accounts	$	1,272,668	$	(73,370	)	$	1,199,298
Prepaid expenses and other current assets	590,998		(190,282		)	400,716
Other assets	503,221		(306,265		)	196,956
Liabilities and Stockholders’ Equity
Accrued expenses	1,314,998		(36,444		)	1,278,554
Deferred revenue, current	3,011,552		58,244			3,069,796
Deferred revenue, long-term	122,522		(2,183		)	120,339
Deferred income taxes	133,886		(87,792		)	46,094
Retained earnings	$	13,183,938	$	(501,742	)	$	12,682,196

There was no net impact to our condensed consolidated statements of comprehensive income and cash flows from operating, financing or investing activities on the condensed consolidated cash flows resulting from the adoption of the new revenue standard other than the impact to reported net income as presented above. The impact to our condensed consolidated statement of stockholders’ equity was only to retained earnings, as presented above.

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(Unaudited)

The most significant impact of the new revenue standard relates to our capitalization of certain incremental costs to acquire contracts and the requirement to amortize these amounts over the expected period of benefit. Under the previous standard, we expensed costs related to the acquisition of revenue-generating contracts as incurred. Additionally, there was impact from arrangements with our customers that include on-premise term-based software licenses bundled with maintenance and support. Under the previous standard, revenue attributable to these software licenses was recognized ratably over the term of the arrangement because vendor-specific objective evidence (“VSOE”) did not exist for the undelivered maintenance and support element as it is not sold separately. The requirement to have VSOE for undelivered elements to enable the separation of revenue recognition for delivered software licenses is eliminated under the new revenue standard. Accordingly, under the new revenue standard we recognize as revenue a portion of the arrangement fee upon delivery of the software licenses and classify that recognized revenue as product revenue instead of subscription revenue in our condensed consolidated statements of income.

Other impacts to our policies and disclosures include earlier recognition of revenue for certain contracts due to the elimination of contingent revenue limitations, the requirement to estimate variable consideration for certain arrangements, increased allocation of revenue to and from professional services and other offerings and changes to our financial statement disclosures such as new disclosures related to our remaining performance obligations. However, the timing and pattern of revenue recognition related to our professional services and cloud-enabled offerings, including Creative Cloud and Document Cloud for enterprises, individuals and teams, remain substantially unchanged. When Creative Cloud and Document Cloud are sold with cloud-enabled services, the on-premise/on-device software licenses and cloud-enabled services are so highly interrelated and interdependent that they are not each separately identifiable within the context of the contract and therefore not distinct from each other. Revenue for these offerings continues to be recognized ratably over the subscription period for which the cloud-enabled services are provided.

Significant Accounting Policies

Revenue Recognition

For revenue recognition policies under Accounting Standards Codification Topic 605, refer to Note 1. Basis of Presentation and Significant Accounting Policies in our Annual Report.

Our revenue is derived from the sale of cloud-enabled software subscriptions, cloud-hosted offerings, term-based, royalty, and perpetual software licenses, associated software maintenance and support plans, consulting services, training and technical support. Most of our enterprise customer arrangements involve multiple promises to our customers.

Revenue is recognized when a contract exists between us and a customer and upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which may be capable of being distinct and accounted for as separate performance obligations, or in the case of offerings such as cloud-enabled Creative Cloud and Document Cloud, accounted for as a single performance obligation. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

Product, Subscription, and Services Offerings

We enter into revenue arrangements in which a customer may purchase a combination of cloud-enabled subscriptions, cloud-hosted offerings, term-based, royalty, and perpetual software licenses, associated software maintenance and support plans, consulting services, training and technical support.

Fully hosted subscription services (Software-as-a-Service) allow customers to access hosted software during the contractual term without taking possession of the software. Cloud-hosted subscription services may be sold on a fee-per-subscription period basis or based on consumption or usage.

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(Unaudited)

We recognize revenue ratably over the contractual service term for hosted services that are priced based on a committed number of transactions where the delivery and consumption of the benefit of the services occur evenly over time, beginning on the date the services associated with the committed transactions are first made available to the customer and continuing through the end of the contractual service term. Over-usage fees and fees based on the actual number of transactions, are billed in accordance with contract terms as these fees are incurred and are included in the transaction price of an arrangement as variable consideration. Fees based on a number of transactions or impressions per month, where invoicing is aligned to the pattern of performance, customer benefit, and consumption, are typically accounted for utilizing the “as-invoiced” practical expedient. Revenue for subscriptions sold as a fee per period is recognized ratably over the contractual term as the customer simultaneously receives and consumes the benefit of the underlying service.

When cloud-enabled services are highly integrated and interrelated with on-premise software, such as in our cloud-enabled Creative Cloud and Document Cloud offerings, the individual components are not considered distinct and revenue is recognized ratably over the subscription period for which the cloud-enabled services are provided.

Licenses for on-premise software may be purchased on a perpetual basis, as a subscription for a fixed period of time or based on usage for certain of our OEM and royalty agreements. Revenue from distinct on-premise licenses is recognized at the point in time the software is available to the customer, provided all other revenue recognition criteria are met, and classified as product revenue on the condensed consolidated statements of income. Some of our enterprise license arrangements allow customers to commit non-cancellable funds. These non-cancellable committed funds are nonrefundable and provide our customers options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services. Revenue associated with these monthly term-based licenses is classified as subscription revenue.

Our services and support revenue is composed of consulting, training, and maintenance and support, primarily related to our enterprise offerings. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. We typically sell our consulting contracts on a time-and-materials basis and recognize the related revenue as services are rendered. We typically sell our maintenance and support contracts on a flat fee or percentage of associated license fees basis and recognize the related revenue ratably over the support term as the underlying service is a stand-ready performance obligation.

We exclude from the transaction price sales and other taxes collected from customers on behalf of the relevant government authority. Most of our products are delivered electronically, however in instances where shipping and handling costs are incurred, we treat these amounts as costs to fulfill the contract and they are not considered a performance obligation and the associated fees are not included in the transaction price.

Judgments

Our contracts with customers may include multiple goods and services. For example, some of our offerings include both on-premise and/or on-device software licenses and cloud services. Determining whether the software licenses and the cloud services are distinct from each other, and therefore performance obligations to be accounted for separately, or not distinct from each other, and therefore part of a single performance obligation, may require significant judgment. We have concluded that the on-premise/on-device software licenses and cloud services provided in our Creative Cloud and Document Cloud subscription offerings are not distinct from each other such that revenue from each offering should be recognized ratably over the subscription period for which the cloud services are provided. In reaching this conclusion, we considered the nature of our promise to Creative Cloud and Document Cloud customers, which is to provide a complete end-to-end creative design or document workflow solution that operates seamlessly across multiple devices and teams. We fulfill this promise by providing access to a solution that integrates cloud-based and on-premise/on-device features that, together through their integration, provide functionalities, utility and workflow efficiencies that could not be obtained from either the on-premise/on-device software or cloud services on their own.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cloud-based features that are integral to our Creative Cloud and Document Cloud offerings and that work together with the on-premise/on-device software include, but are not limited to: Creative Cloud Libraries, which enable customers to access their work, settings, preferences, and other assets seamlessly across desktop and mobile devices and collaborate across teams in real time; shared reviews which enable simultaneous editing and commenting of PDFs across desktop, mobile, and web; automatic cloud rendering of a design which enables it to be worked on in multiple mediums; and Sensei, Adobe’s cloud-hosted artificial intelligence and machine learning framework, which enables features such as automated photo-editing, photograph content-awareness, natural language processing, optical character recognition, and automated document tagging.

Standalone selling price is established by maximizing the amount of observable inputs, primarily actual historical selling prices for performance obligations where available, and includes consideration of factors such as go-to-market model and geography. Individual products may have multiple values for standalone selling price depending on factors such as where they are sold and what channel they are sold through. Where standalone selling price may not be directly observable (e.g., the performance obligation is not sold separately), we maximize the use of observable inputs by using information that may include reviewing pricing practices, performance obligations with similar customers and selling models.

Capitalized costs to obtain a contract are amortized over the expected period of benefit, which we have determined, based on analysis, to be 5 years. We evaluated qualitative and quantitative factors to determine the period of amortization, including contract length, renewals, customer life and the useful lives of our products and acquired products. When the expected period of benefit of an asset which would be capitalized is less than one year, we expense the amount as incurred, utilizing the practical expedient. We regularly evaluate whether there have been changes in the underlying assumptions and data used to determine the amortization period.

We offer limited rights of return, rebates and price protection of our products under various policies and programs with our distributors, resellers and/or end-user customers. We estimate and record reserves for these programs as variable consideration when estimating transaction price. Returns, rebates and other offsets to transaction price are estimated at contract inception on a portfolio basis and assessed for reasonableness each reporting period when additional information becomes available.

General Contract Provisions

We maintain revenue reserves for rebates, rights of return, or other limited price adjustments.

Distributors are allowed limited rights of return of products purchased during the previous quarter. In addition, distributors are allowed to return products that have reached the end of their lives, as defined by us, and for products that are being replaced by new versions.

We offer rebates to our distributors, resellers and/or end user customers. Transaction price is reduced for these amounts based on actual performance against objectives set forth by us for a particular reporting period, such as volume and timely reporting.

On a quarterly basis, the amount of revenue that is reserved is calculated based on our historical trends and data specific to each reporting period. The primary method of establishing these reserves is to review historical data from prior periods as a percent of revenue to determine a historical reserve rate. We then apply the historical rate to the current period revenue as a basis for estimating future returns. When necessary, we also provide a specific reserve in excess of portfolio-level estimated requirements. This estimate can be affected by the amount of a particular product in the channel, the rate of sell-through, product plans and other factors.

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(Unaudited)

Although our subscription contracts are generally non-cancellable, a limited number of customers have the right to cancel their contracts by providing prior written notice to us of their intent to cancel the remainder of the contract term and consumers have a period of time to terminate certain agreements without penalty. In the event a customer cancels their contract, they are generally not entitled to a refund for prior services we have provided to them. Contracts that include termination rights without substantive penalty are accounted for as contracts only for the committed period. Periods of time after the right of termination are accounted for as optional purchases when they do not represent material rights. For certain of our usage-based license agreements, typically in our royalty and OEM businesses, reporting may be received after the end of a fiscal period. In such instances, we estimate and accrue license revenue. We base our estimates on multiple factors, including historical sales information, seasonality and other business information which may impact our estimates. We do not estimate variable consideration for our sales and usage-based license royalty agreements, consistent with the associated practical expedient under the new revenue standard.

Recent Accounting Pronouncements Not Yet Effective

On February 24, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases with a lease term of twelve months or less. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new leases standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new leases standard is effective for us beginning in the first quarter of fiscal 2020, and we will not early adopt.

The new leases standard must be adopted using a modified retrospective transition method and allows for the application of the new guidance at the beginning of the earliest comparative period presented or at the adoption date. In July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements, providing an optional transition method that allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We intend to adopt the new leases standard using this optional transition method.

While we are continuing to assess the potential impacts of the standard, we currently expect the most significant impact will be the recognition of right-of-use assets and lease liabilities on our balance sheet. The standard is not expected to have a material impact to our condensed consolidated statements of income and cash flows. We are implementing a new lease accounting system and are updating our processes in preparation for the adoption of the new leases standard.

On August 28, 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging, requiring expanded hedge accounting for both non-financial and financial risk components and refining the measurement of hedge results to better reflect an entity’s hedging strategies. For example, adoption would result in reclassification of hedge costs from foreign currency hedges from interest and other income (expense), net to revenue in our statements of income. The updated standard also amends the presentation and disclosure requirements and changes how entities assess hedge effectiveness. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition with a cumulative-effect adjustment recorded to opening retained earnings as of the initial adoption date. The updated standard is effective for us beginning in the first quarter of fiscal 2020, which is when we plan to adopt the standard. While we are continuing to assess the potential impacts of the standard, we currently do not expect it to have a material impact on our condensed consolidated financial statements and related disclosures.

With the exception of the new standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended May 31, 2019, as compared to the recent accounting pronouncements described in our Annual Report, that are of significance or potential significance to us.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 2. REVENUE

Revenue for the three and six months ended May 31, 2019 presented below is in accordance with a new revenue standard that was adopted under the modified retrospective method. Prior period revenue has not been restated.

Our segment results for the three months ended May 31, 2019 and June 1, 2018 were as follows (dollars in thousands):



	Digital Media			Digital Experience			Publishing			Total
Three months ended May 31, 2019
Revenue	$	1,890,151		$	783,542		$	70,587		$	2,744,280
Cost of revenue	70,734			331,675			5,079			407,488
Gross profit	$	1,819,417		$	451,867		$	65,508		$	2,336,792
Gross profit as a percentage of revenue	96		%	58		%	93		%	85		%
Three months ended June 1, 2018
Revenue	$	1,546,424		$	585,952		$	62,984		$	2,195,360
Cost of revenue	54,760			220,696			5,888			281,344
Gross profit	$	1,491,664		$	365,256		$	57,096		$	1,914,016
Gross profit as a percentage of revenue	96		%	62		%	91		%	87		%

Our segment results for the six months ended May 31, 2019 and June 1, 2018 were as follows (dollars in thousands):



	Digital Media			Digital Experience			Publishing			Total
Six months ended May 31, 2019
Revenue	$	3,666,794		$	1,526,818		$	151,614		$	5,345,226
Cost of revenue	138,929			655,383			10,462			804,774
Gross profit	$	3,527,865		$	871,435		$	141,152		$	4,540,452
Gross profit as a percentage of revenue	96		%	57		%	93		%	85		%
Six months ended June 1, 2018
Revenue	$	3,006,985		$	1,140,059		$	127,263		$	4,274,307
Cost of revenue	110,229			419,488			10,529			540,246
Gross profit	$	2,896,756		$	720,571		$	116,734		$	3,734,061
Gross profit as a percentage of revenue	96		%	63		%	92		%	87		%

Revenue by geographic area for the three and six months ended May 31, 2019 and June 1, 2018 were as follows (in thousands):



	Three Months				Six Months
	2019		2018		2019		2018
Americas	$	1,599,176	$	1,239,553	$	3,109,071	$	2,410,234
EMEA	729,342		621,796		1,432,303		1,209,064
APAC	415,762		334,011		803,852		655,009
Total	$	2,744,280	$	2,195,360	$	5,345,226	$	4,274,307

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Revenue by major offerings in our Digital Media reportable segment for the three and six months ended May 31, 2019 and June 1, 2018 were as follows (in thousands):



	Three Months				Six Months
	2019		2018		2019		2018
Creative Cloud	$	1,594,019	$	1,303,463	$	3,088,907	$	2,532,958
Document Cloud	296,132		242,961		577,887		474,027
Total	$	1,890,151	$	1,546,424	$	3,666,794	$	3,006,985

Subscription revenue by segment for the three and six months ended May 31, 2019 and June 1, 2018 were as follows (in thousands):



	Three Months				Six Months
	2019		2018		2019		2018
Digital Media	$	1,773,669	$	1,425,919	$	3,437,308	$	2,760,578
Digital Experience	654,048		469,406		1,265,976		900,273
Publishing	28,380		27,806		57,780		55,638
Total	$	2,456,097	$	1,923,131	$	4,761,064	$	3,716,489

Contract Balances

Trade Receivables

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. Timing of revenue recognition may differ from the timing of invoicing to customers. Certain performance obligations may require payment before delivery of the license or service to the customer. 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 occurring.

The opening balance of trade receivables, net of allowances for doubtful accounts, as of December 1, 2018 was $1.36 billion, inclusive of unbilled receivables of $105.8 million. As of May 31, 2019, the balance of trade receivables, net of allowances for doubtful accounts, was $1.27 billion, inclusive of unbilled receivables of $118.6 million.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts which reflects our best estimate of potentially uncollectible trade receivables. The allowance is based on both specific and general reserves. We regularly review our trade receivables allowance by considering such factors as historical experience, credit-worthiness, the age of the trade receivable balances and current economic conditions that may affect a customer’s ability to pay and we specifically reserve for those deemed uncollectible.

The opening balance of allowance for doubtful accounts as of December 1, 2018 was $15.0 million. As of May 31, 2019, the balance of allowance for doubtful accounts was $12.4 million.

Contract Assets

A contract asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract assets are typically related to subscription and hosted service contracts where the transaction price allocated to the satisfied performance obligations exceeds the value of billings to date. 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.

The opening balance of contract assets as of December 1, 2018 was $46.4 million. As of May 31, 2019, the balance of contract assets was $41.5 million.

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(Unaudited)

Deferred Revenue and Remaining Performance Obligations

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 deposits. Deferred revenue is recognized as revenue when transfer of control to customers has occurred. Customers are typically invoiced for these agreements in regular installments and revenue is recognized ratably over the contractual subscription period. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, size and new business linearity within the quarter. Deferred revenue does not represent the total contract value of annual or multi-year non-cancellable subscription agreements.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, such as invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and not to receive financing from our customers. Any potential financing fees are considered insignificant in the context of our contracts.

The adjusted opening balance of deferred revenue as of December 1, 2018 was $3.00 billion. As of May 31, 2019, the balance of deferred revenue was $3.13 billion, inclusive of $222.2 million of non-cancellable and non-refundable committed funds and $47.0 million of refundable customer deposits. Arrangements with non-cancellable and non-refundable committed funds provide our customers options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services. Refundable customer deposits represent arrangements in which the customer has a unilateral cancellation right for which we are obligated to refund amounts paid related to products or services not yet delivered or provided at the time of cancellation on a prorated basis.

Significant movements in the deferred revenue balance during the period consisted of increases due to payments received prior to transfer of control of the underlying performance obligations to the customer and deferred revenue assumed through business combinations, which were offset by decreases due to revenue recognized in the period. During the three and six months ended May 31, 2019, approximately $0.8 billion and $2.2 billion of revenue, respectively, was recognized that was included in the adjusted opening balance of deferred revenue as of December 1, 2018.

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. Transaction price allocated to the remaining performance obligation is influenced by several factors, including the timing of renewals and average contract terms. We applied practical expedients to exclude amounts related to performance obligations that are billed and recognized as they are delivered, optional purchases that do not represent material rights, sales- and usage-based royalties not yet consumed and any estimated amounts of variable consideration that are subject to constraint in accordance with the new revenue standard.

Remaining performance obligations were approximately $8.37 billion as of May 31, 2019, which includes $574.5 million of non-cancellable and non-refundable committed funds related to some of our enterprise customer agreements. Approximately 74% of the remaining performance obligations, excluding the aforementioned enterprise customer agreements, are expected to be recognized over the next 12 months with the remainder recognized thereafter.

Contract Acquisition Costs

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized.

The costs capitalized under the new revenue standard are primarily sales commissions paid to our sales force personnel. Capitalized costs may also include portions of fringe benefits and payroll taxes associated with compensation for incremental costs to acquire customer contracts and incentive payments to partners.

Capitalized costs to obtain a contract are amortized over the expected period of benefit, which we have determined, based on analysis, to be 5 years. Amortization of capitalized costs are included in our sales and marketing expense in our condensed consolidated statements of income.

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(Unaudited)

The opening balance of capitalized contract acquisition costs as of December 1, 2018 was $413.2 million. As of May 31, 2019, the balance of capitalized contract acquisition costs was $455.1 million, of which $302.5 million was long-term and included in other assets in the condensed consolidated balance sheets. The remaining balance of the capitalized costs to obtain contracts were current and included in prepaid expenses and other current assets.

Refund Liabilities

As part of our revenue reserves, 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.

The opening balance of refund liabilities as of December 1, 2018 was $75.3 million. As of May 31, 2019, the balance of refund liabilities was $85.2 million.

NOTE 3. ACQUISITIONS

Allegorithmic

On January 23, 2019, we completed the acquisition of Allegorithmic, a privately held 3D editing and authoring software company for gaming and entertainment. Prior to the acquisition, we held an equity interest that was accounted for as an equity-method investment. We acquired the remaining equity interest for approximately $105.3 million in cash consideration. The total purchase price, inclusive of the acquisition-date fair-value of our pre-existing equity interest, was approximately $159.7 million. Following the closing, we began integrating Allegorithmic into our Digital Media reportable segment.

In conjunction with the acquisition, we separately recognized an investment gain of approximately $41.5 million, which represents the difference between the $54.4 million acquisition-date fair value of our pre-existing equity interest and our previous carrying amount.

Under the acquisition method of accounting, the total purchase price was preliminarily allocated to Allegorithmic’s net tangible and intangible assets based upon their estimated fair values as of January 23, 2019. During the three months ended May 31, 2019, we recorded immaterial purchase accounting adjustments based on changes to management’s estimates and assumptions in regards to identifiable intangible assets and their related impact to goodwill. The total purchase price for Allegorithmic was preliminarily allocated to goodwill that is non-deductible for tax purposes of $124.7 million and to identifiable intangible assets of $44.8 million, with the remaining amount representing net liabilities assumed. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date and are considered preliminary pending finalization of valuation analyses pertaining to tax liabilities assumed including the calculation of deferred tax assets and liabilities.

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

Marketo

On October 31, 2018, we completed the acquisition of Marketo, a privately held marketing cloud platform company, for approximately $4.73 billion of cash consideration. Adding Marketo’s engagement platform to Adobe Experience Cloud furthers our long-term plan for strategic growth in the Digital Experience segment and enables us to offer a comprehensive set of solutions to enable customers across industries and companies automate and orchestrate their marketing activities. Under the terms of the Share Purchase Agreement (“Purchase Agreement”), we acquired all of the issued and outstanding shares of capital stock of Milestone Topco, Inc., a Delaware corporation (“Topco”) and indirect parent company of Marketo, and other equity interests in Marketo. In connection with the acquisition, each Marketo equity award that was issued and outstanding was cancelled and extinguished in exchange for cash consideration. Also pursuant to the Purchase Agreement, upon closing of the transaction, cash was paid for the settlement of Marketo’s long-term incentive plan, the settlement of Marketo’s indebtedness and the acquisition of all remaining equity interests in Marketo K.K., a Japanese corporation and joint venture.

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In connection with the acquisition of Marketo, we entered into a credit agreement providing for a $2.25 billion senior unsecured term loan (“Term Loan”). The proceeds of the Term Loan were used to fund a portion of the purchase price of the acquisition and pay fees and expenses incurred in connection with the acquisition. The Term Loan funds were received on October 31, 2018 upon closing of the acquisition. See Note 14 for further details regarding our Term Loan.

Following the closing, we began integrating Marketo into our Digital Experience reportable segment and have included the financial results of Marketo in our consolidated financial statements beginning on the acquisition date. The amounts of net revenue and net loss of Marketo included in our consolidated statements of income from the acquisition date through November 30, 2018 were not material. The direct transaction costs associated with the acquisition were also not material.

Purchase Price Allocation

Under the purchase accounting method, the total preliminary purchase price was allocated to Marketo’s net tangible and intangible assets based upon their estimated fair values as of the acquisition date. The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill. During the six months ended May 31, 2019, we recorded immaterial purchase accounting adjustments based on changes to management’s estimates and assumptions in regards to total estimated purchase price, identifiable intangible assets, net liabilities assumed and their related impact to goodwill.

The table below represents the preliminary purchase price allocation to the acquired net tangible and intangible assets of Marketo based on their estimated fair values as of the acquisition date and the associated estimated useful lives at that date. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date and are considered preliminary pending finalization of valuation analyses pertaining tax liabilities assumed including the calculation of deferred tax assets and liabilities.



(in thousands)	Amount			Weighted Average Useful Life (years)
Customer contracts and relationships	$	577,500		11
Purchased technology	444,500			7
Backlog	105,500			2
Non-competition agreements	12,100			2
Trademarks	328,500			9
Total identifiable intangible assets	1,468,100
Net liabilities assumed	(194,588		)	N/A
Goodwill⁽¹⁾	3,459,256			N/A
Total estimated purchase price	$	4,732,768

^{_________________________________________}


⁽¹⁾	Non-deductible for tax-purposes.

Identifiable intangible assets — Customer relationships consist of Marketo’s contractual relationships and customer loyalty related to their enterprise and commercial customers as well as technology partner relationships. The estimated fair value of the customer contracts and relationships was determined based on projected cash flows attributable to the asset. Purchased technology acquired primarily consists of Marketo’s cloud-based engagement marketing software platform. The estimated fair value of the purchased technology was determined based on the expected future cost savings resulting from ownership of the asset. Backlog relates to subscription contracts and professional services. Non-compete agreements include agreements with key Marketo employees that preclude them from competing against Marketo for a period of two years from the acquisition date. Trademarks include the Marketo trade name, which is well known in the marketing ecosystem. We amortize the fair value of these intangible assets on a straight-line basis over their respective estimated useful lives.

Goodwill — Approximately $3.46 billion has been allocated to goodwill entirely to our Digital Experience reportable segment. Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets. The factors that contributed to the recognition of goodwill included securing buyer-specific synergies that increase revenue and profits and are not otherwise available to a marketplace participant, acquiring a talented workforce and cost savings opportunities.

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Net liabilities assumed — Marketo’s tangible assets and liabilities as of October 31, 2018 were reviewed and adjusted to their fair value as necessary. The net liabilities assumed included, among other items, $102.6 million in accrued expenses, $74.8 million in deferred revenue and $182.6 million in deferred tax liabilities, which were partially offset by $54.9 million in cash and cash equivalents and $71.6 million in trade receivables acquired.

Deferred revenue — Included in net liabilities assumed is Marketo’s deferred revenue which represents advance payments from customers related to subscription contracts and professional services. We estimated our obligation related to the deferred revenue using the cost build-up approach. The cost build-up approach determines fair value by estimating the direct and indirect costs related to supporting the obligation plus an assumed operating margin. The sum of the costs and assumed operating profit approximates, in theory, the amount that Marketo would be required to pay a third party to assume the obligation. The estimated costs to fulfill the obligation were based on the near-term projected cost structure for subscription and professional services. As a result, we recorded an adjustment to reduce Marketo’s carrying value of deferred revenue to $74.8 million, which represents our estimate of the fair value of the contractual obligations assumed based on a preliminary valuation.

Taxes — As part of our accounting for the Marketo acquisition, a portion of the overall purchase price was allocated to goodwill and acquired intangible assets. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Thus, approximately $348.8 million, included in the net liabilities assumed, was established as a deferred tax liability for the future amortization of the intangible assets, and was partially offset by other tax assets of $166.2 million, which primarily consist of net operating loss carryforwards.

Any impairment charges made in the future associated with goodwill will not be tax deductible and will result in an increased effective income tax rate in the quarter the impairment is recorded.

Magento

On June 18, 2018, we completed our acquisition of Magento Commerce (“Magento”), a privately-held commerce platform company. Following the closing, we began integrating Magento into our Digital Experience reportable segment.

The table below represents the final purchase price allocation to the acquired net assets of Magento based on their estimated fair values as of June 18, 2018 and the associated estimated useful lives at that date. During the first quarter of fiscal 2019, we recorded immaterial purchase accounting adjustments based on changes to management’s estimates and assumptions in regards to net liabilities assumed and their related impact to goodwill.



(in thousands)	Amount			Weighted Average Useful Life (years)
Customer contracts and relationships	$	208,000		8
Purchased technology	84,200			5
In-process research and development ⁽¹⁾	39,100			N/A
Trademarks	21,100			3
Other intangibles	43,400			3
Total identifiable intangible assets	395,800
Net liabilities assumed	(68,182		)	N/A
Goodwill⁽²⁾	1,316,983			N/A
Total estimated purchase price	$	1,644,601

^{_________________________________________}


⁽¹⁾	Capitalized as purchased technology and are considered indefinite lived until the completion or abandonment of the associated research and development efforts. During the first quarter of fiscal 2019, one of the associated in-process research and development efforts was completed and another one was abandoned. The respective related amortization and write-off were each immaterial.


⁽²⁾	Non-deductible for tax-purposes.

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NOTE 4. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. We classify all of our cash equivalents and short-term investments as “available-for-sale.” In general, these investments are free of trading restrictions. We carry these investments at fair value, based on quoted market prices or other readily available market information. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our condensed consolidated balance sheets. Gains and losses are recognized when realized in our condensed consolidated statements of income. When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in income. Gains and losses are determined using the specific identification method.

Cash, cash equivalents and short-term investments consisted of the following as of May 31, 2019 (in thousands):



	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Current assets:
Cash	$	400,023	$	—	$	—		$	400,023
Cash equivalents:
Corporate debt securities	144,563		—		(8		)	144,555
Money market mutual funds	1,474,933		—		—			1,474,933
Municipal securities	1,000		—		—			1,000
Time deposits	57,400		—		—			57,400
U.S. agency securities	4,999		—		—			4,999
Total cash equivalents	1,682,895		—		(8		)	1,682,887
Total cash and cash equivalents	2,082,918		—		(8		)	2,082,910
Short-term fixed income securities:
Asset-backed securities	61,145		59		(80		)	61,124
Corporate debt securities	1,314,844		804		(3,616		)	1,312,032
Foreign government securities	2,399		—		(6		)	2,393
Municipal securities	20,499		47		(26		)	20,520
Total short-term investments	1,398,887		910		(3,728		)	1,396,069
Total cash, cash equivalents and short-term investments	$	3,481,805	$	910	$	(3,736	)	$	3,478,979

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of November 30, 2018 (in thousands):



	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Current assets:
Cash	$	368,564	$	—	$	—		$	368,564
Cash equivalents:
Money market mutual funds	1,234,188		—		—			1,234,188
Time deposits	40,023		—		—			40,023
Total cash equivalents	1,274,211		—		—			1,274,211
Total cash and cash equivalents	1,642,775		—		—			1,642,775
Short-term fixed income securities:
Asset-backed securities	41,875		—		(367		)	41,508
Corporate debt securities	1,546,860		44		(24,696		)	1,522,208
Foreign government securities	4,179		—		(24		)	4,155
Municipal securities	18,601		1		(286		)	18,316
Total short-term investments	1,611,515		45		(25,373		)	1,586,187
Total cash, cash equivalents and short-term investments	$	3,254,290	$	45	$	(25,373	)	$	3,228,962

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

The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that have been in an unrealized loss position for less than twelve months, as of May 31, 2019 and November 30, 2018 (in thousands):



	2019					2018
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Corporate debt securities	$	178,253	$	(43	)	$	538,109	$	(7,966	)
Asset-backed securities	5,501		—			6,696		(54		)
Municipal securities	1,942		—			6,599		(81		)
Total	$	185,696	$	(43	)	$	551,404	$	(8,101	)

There were 58 securities and 369 securities in an unrealized loss position for less than twelve months at May 31, 2019 and at November 30, 2018, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category, that were in a continuous unrealized loss position for more than twelve months, as of May 31, 2019 and November 30, 2018 (in thousands):



	2019					2018
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Corporate debt securities	$	940,760	$	(3,581	)	$	969,701	$	(16,730	)
Asset-backed securities	24,847		(80		)	34,812		(313		)
Municipal securities	8,725		(26		)	11,532		(205		)
Foreign government securities	2,393		(6		)	4,154		(24		)
Total	$	976,725	$	(3,693	)	$	1,020,199	$	(17,272	)

There were 547 securities and 577 securities in an unrealized loss position for more than twelve months at May 31, 2019 and at November 30, 2018, respectively.

The following table summarizes the cost and estimated fair value of short-term fixed income securities classified as short-term investments based on stated effective maturities as of May 31, 2019 (in thousands):



	Amortized Cost		Estimated Fair Value
Due within one year	$	612,044	$	610,831
Due between one and two years	587,933		586,542
Due between two and three years	136,276		136,058
Due after three years	62,634		62,638
Total	$	1,398,887	$	1,396,069

We review our debt securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. We consider factors such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and our intent to sell, or whether it is more likely than not we will be required to sell the investment before recovery of the investment’s amortized cost basis. If we believe that an other-than-temporary decline exists in one of these securities, we write down these investments to fair value. The portion of the write-down related to credit loss would be recorded to interest and other income, net in our condensed consolidated statements of income. Any portion not related to credit loss would be recorded to accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our condensed consolidated balance sheets. During the six months ended May 31, 2019 and June 1, 2018, we did not consider any of our investments to be other-than-temporarily impaired.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 5. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

We measure certain financial assets and liabilities at fair value on a recurring basis. There have been no transfers between fair value measurement levels during the six months ended May 31, 2019.

The fair value of our financial assets and liabilities at May 31, 2019 was determined using the following inputs (in thousands):



	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents:
Corporate debt securities	$	144,555	$	—	$	144,555	$	—
Money market mutual funds	1,474,933		1,474,933		—		—
Municipal securities	1,000		—		1,000		—
Time deposits	57,400		57,400		—		—
U.S. agency securities	4,999		—		4,999		—
Short-term investments:
Asset-backed securities	61,124		—		61,124		—
Corporate debt securities	1,312,032		—		1,312,032		—
Foreign government securities	2,393		—		2,393		—
Municipal securities	20,520		—		20,520		—
Prepaid expenses and other current assets:
Foreign currency derivatives	30,241		—		30,241		—
Other assets:
Deferred compensation plan assets	81,749		4,121		77,628		—
Total assets	$	3,190,946	$	1,536,454	$	1,654,492	$	—



Liabilities:
Accrued expenses:
Foreign currency derivatives	$	2,149	$	—	$	2,149	$	—
Other liabilities:
Interest rate swap derivatives	2,964		—		2,964		—
Total liabilities	$	5,113	$	—	$	5,113	$	—

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of our financial assets and liabilities at November 30, 2018 was determined using the following inputs (in thousands):



	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash equivalents:
Money market mutual funds	$	1,234,188	$	1,234,188	$	—	$	—
Time deposits	40,023		40,023		—		—
Short-term investments:
Asset-backed securities	41,508		—		41,508		—
Corporate debt securities	1,522,208		—		1,522,208		—
Foreign government securities	4,155		—		4,155		—
Municipal securities	18,316		—		18,316		—
Prepaid expenses and other current assets:
Foreign currency derivatives	44,259		—		44,259		—
Other assets:
Deferred compensation plan assets	68,988		3,895		65,093		—
Total assets	$	2,973,645	$	1,278,106	$	1,695,539	$	—



Liabilities:
Accrued expenses:
Foreign currency derivatives	$	816	$	—	$	816	$	—
Other liabilities:
Interest rate swap derivatives	9,744		—		9,744		—
Total liabilities	$	10,560	$	—	$	10,560	$	—

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 A+. We value these securities based on pricing from independent pricing vendors who use matrix pricing valuation techniques including market approach methodologies that model information generated by market transactions involving identical or comparable assets, as well as discounted cash flow methodologies. Inputs include quoted prices in active markets for identical assets or inputs other than quoted prices that are observable either directly or indirectly in determining fair value, including benchmark yields, issuer spreads off benchmark yields, interest rates and U.S. Treasury or swap curves. We therefore classify all of our fixed income available-for-sale securities as Level 2. We perform routine procedures such as comparing prices obtained from multiple independent sources to ensure that appropriate fair values are recorded.

The fair values of our money market mutual funds and time deposits are based on the closing price of these assets as of the reporting date. We classify our money market mutual funds and time deposits as Level 1.

Our Level 2 over-the-counter foreign currency and interest rate swap derivatives are valued using pricing models and discounted cash flow methodologies based on observable foreign exchange and interest rate data at the measurement date.

Our deferred compensation plan assets consist of money market mutual funds and other mutual funds.

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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The fair value of our senior notes was $1.95 billion as of May 31, 2019, 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. DERIVATIVES AND HEDGING ACTIVITIES

Hedge Accounting and Hedging Programs

We recognize derivative instruments and hedging activities as either assets or liabilities in our condensed consolidated balance sheets and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.

We evaluate hedge effectiveness at the inception of the hedge prospectively as well as retrospectively, and record any ineffective portion of the hedging instruments in interest and other income (expense), net on our condensed consolidated statements of income. The net gain (loss) recognized in interest and other income (expense), net for cash flow hedges due to hedge ineffectiveness was insignificant for all fiscal years presented. The time value of purchased contracts is recorded in interest and other income (expense), net in our condensed consolidated statements of income.

The bank counterparties to these contracts expose us to credit-related losses in the event of their nonperformance which are largely mitigated with collateral security agreements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. In addition, we enter into master netting arrangements which have the ability to further limit credit-related losses with the same counterparty by permitting net settlement of transactions.

Balance Sheet Hedging—Hedges of Foreign Currency Assets and Liabilities

We also hedge our net recognized foreign currency denominated assets and liabilities with foreign exchange forward contracts to reduce the risk that the value of these assets and liabilities will be adversely affected by changes in exchange rates. These contracts hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded to interest and other income (expense), net in our condensed consolidated statements of income. These contracts do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged.

Cash Flow Hedging—Hedges of Forecasted Foreign Currency Revenue

In countries outside the United States, we transact business in U.S. Dollars and in various other currencies. We may use foreign exchange option contracts or forward contracts to hedge certain cash flow exposures resulting from changes in these foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities of up to twelve months. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business and accordingly, they are not speculative in nature.

To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income (loss) in our condensed consolidated balance sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to interest and other income (expense), net in our condensed consolidated statements of income at that time. If we do not elect hedge accounting, or the contract does not qualify for hedge accounting treatment, the changes in fair value from period to period are recorded in interest and other income (expense), net in our condensed consolidated statements of income.

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(Unaudited)

Fair Value Hedging - Hedges of Interest Rate Risk

In fiscal 2014, we entered into interest rate swaps designated as fair value hedges related to our $900 million 4.75% fixed interest rate senior notes due February 1, 2020 (“2020 Notes”). In effect, the interest rate swaps convert the fixed interest rate on the 2020 Notes to a floating interest rate based on the London Interbank Offered Rate (“LIBOR”). Under the terms of the swaps, we will pay monthly interest at the one-month LIBOR rate plus a fixed number of basis points on the $900 million notional amount through February 1, 2020. In exchange, we will receive 4.75% fixed rate interest from the swap counterparties. See Note 14 for further details regarding our debt.

The interest rate swaps are accounted for as fair value hedges and substantially offset the changes in fair value of the hedged portion of the underlying debt that are attributable to the changes in market risk. Therefore, the gains and losses related to changes in the fair value of the interest rate swaps are included in interest and other income (expense), net in our condensed consolidated statements of income. As of March 1, 2019, the fair value of the interest rate swaps was added to the carrying value of current debt in our condensed consolidated balance sheets.

The fair value of derivative instruments on our condensed consolidated balance sheets as of May 31, 2019 and November 30, 2018 were as follows (in thousands):



	2019				2018
	Fair Value Asset Derivatives		Fair Value Liability Derivatives		Fair Value Asset Derivatives		Fair Value Liability Derivatives
Derivatives designated as hedging instruments:
Foreign exchange option contracts^{(1) (2)}	$	27,254	$	—	$	40,191	$	—
Interest rate swap ⁽³⁾	—		2,964		—		9,744
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts ⁽¹⁾	2,987		2,149		4,068		816
Total derivatives	$	30,241	$	5,113	$	44,259	$	10,560

^{_________________________________________}


⁽¹⁾	Fair value asset derivatives included in prepaid expenses and other current assets and fair value liability derivatives included in accrued expenses on our consolidated balance sheets.


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


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

The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our condensed consolidated statements of income for the three months ended May 31, 2019 and June 1, 2018 was as follows (in thousands):



	2019					2018
	Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts		Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts
Derivatives in cash flow hedging relationships:
Net gain (loss) recognized in OCI, net of tax⁽¹⁾	$	16,765		$	—	$	31,104		$	—
Net gain (loss) reclassified from accumulated OCI into income, net of tax⁽²⁾	$	8,990		$	—	$	337		$	—
Net gain (loss) recognized in income⁽³⁾	$	(12,127	)	$	—	$	(12,084	)	$	—
Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income⁽⁴⁾	$	—		$	2,887	$	—		$	2,784

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The effect of foreign currency derivative instruments designated as cash flow hedges and of foreign currency derivative instruments not designated as hedges in our condensed consolidated statements of income for the six months ended May 31, 2019 and June 1, 2018 was as follows (in thousands):



	2019					2018
	Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts		Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts
Derivatives in cash flow hedging relationships:
Net gain (loss) recognized in OCI, net of tax⁽¹⁾	$	8,308		$	—	$	29,767		$	—
Net gain (loss) reclassified from accumulated OCI into income, net of tax⁽²⁾	$	17,491		$	—	$	1,359		$	—
Net gain (loss) recognized in income⁽³⁾	$	(24,269	)	$	—	$	(22,410	)	$	—
Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income⁽⁴⁾	$	—		$	1,368	$	—		$	(877	)

^{_________________________________________}


⁽¹⁾	Net change in the fair value of the effective portion classified in other comprehensive income (“OCI”).


⁽²⁾	Effective portion classified as revenue.


⁽³⁾	Ineffective portion and amount excluded from effectiveness testing classified in interest and other income (expense), net.


⁽⁴⁾	Classified in interest and other income (expense), net.

Subsequent Event

Subsequent to May 31, 2019, in anticipation of refinancing our $2.25 billion Term Loan due April 30, 2020 and $900 million 2020 Notes due February 1, 2020, we entered into interest rate 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 hedge the impact of changes in the benchmark interest rate to future interest payments and will be terminated upon debt issuance. We will account for these instruments as cash flow hedges in the third quarter of fiscal 2019.

NOTE 7. GOODWILL AND PURCHASED AND OTHER INTANGIBLES

Goodwill as of May 31, 2019 and November 30, 2018 was $10.70 billion and $10.58 billion, respectively. The increase was primarily due to our acquisition of Allegorithmic in the first quarter of fiscal 2019. During the second quarter of fiscal 2019, we completed our annual goodwill impairment test associated with our reporting units and determined there was no impairment of goodwill.

Purchased and other intangible assets subject to amortization as of May 31, 2019 and November 30, 2018 were as follows (in thousands):



	2019							2018
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Purchased technology	$	774,307	$	(170,752	)	$	603,555	$	750,286	$	(118,812	)	$	631,474
Customer contracts and relationships	$	1,247,138	$	(397,340	)	$	849,798	$	1,329,432	$	(416,176	)	$	913,256
Trademarks	384,855		(50,039		)	334,816		384,855		(25,968		)	358,887
Acquired rights to use technology	59,906		(46,683		)	13,223		58,966		(48,770		)	10,196
Backlog	147,000		(46,565		)	100,435		147,300		(13,299		)	134,001
Other intangibles	23,807		(8,485		)	15,322		51,096		(29,909		)	21,187
Total other intangible assets	$	1,862,706	$	(549,112	)	$	1,313,594	$	1,971,649	$	(534,122	)	$	1,437,527
Purchased and other intangible assets, net	$	2,637,013	$	(719,864	)	$	1,917,149	$	2,721,935	$	(652,934	)	$	2,069,001

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(Unaudited)

Amortization expense related to purchased and other intangible assets was $98.4 million and $203.0 million for the three and six months ended May 31, 2019, respectively. Comparatively, amortization expense related to purchased and other intangible assets was $34.6 million and $68.5 million for the three and six months ended June 1, 2018, respectively. Of these amounts, $55.4 million and $113.4 million were included in cost of sales for the three and six months ended May 31, 2019, respectively, and $17.4 million and $34.0 million were included in cost of sales for the three and six months ended June 1, 2018, respectively.

During the six months ended May 31, 2019, certain purchased intangibles associated with our acquisitions became fully amortized and were removed from the condensed consolidated balance sheets.

As of May 31, 2019, we expect amortization expense in future periods to be as follows (in thousands):



Fiscal Year	Purchased Technology		Other Intangible Assets
Remainder of 2019	$	63,578	$	131,537
2020	125,931		237,337
2021	103,698		149,829
2022	86,880		134,436
2023	76,876		134,245
Thereafter	146,592		526,210
Total expected amortization expense	$	603,555	$	1,313,594

NOTE 8. ACCRUED EXPENSES

Accrued expenses as of May 31, 2019 and November 30, 2018 consisted of the following (in thousands):



	2019		2018
Accrued compensation and benefits	$	402,157	$	313,874
Accrued bonuses	143,380		216,007
Accrued media costs	121,738		124,849
Sales and marketing allowances	48,737		44,968
Accrued corporate marketing	105,282		66,186
Accrued building rent	74,168		61,544
Taxes payable	63,106		57,525
Royalties payable	50,815		51,529
Accrued interest expense	29,887		29,481
Other	275,728		197,222
Accrued expenses	$	1,314,998	$	1,163,185

Accrued media costs primarily relate to our advertising platform offerings which are part of the Advertising Cloud. We accrue for media costs related to impressions purchased from third-party ad inventory sources. Other primarily includes general corporate accruals for local and regional expenses, sales returns reserves and foreign currency liability derivatives.

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NOTE 9. STOCK-BASED COMPENSATION

Restricted Stock Units

Restricted stock unit activity for the six months ended May 31, 2019 was as follows (in thousands):



	2019
Beginning outstanding balance	8,668
Awarded	3,731
Released	(3,221	)
Forfeited	(386	)
Ending outstanding balance	8,792

Beginning January 2019, restricted stock units granted as part of our annual review process or for promotions will vest over four years. Restricted stock units granted as part of our annual review process or for promotions with grant dates prior to January 2019 continue to vest over three years.

Information regarding restricted stock units outstanding at May 31, 2019 and June 1, 2018 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2019
Restricted stock units outstanding	8,792	1.44	$	2,381.8
Restricted stock units expected to vest	7,950	1.37	$	2,153.5
2018
Restricted stock units outstanding	9,046	1.36	$	2,273.3
Restricted stock units expected to vest	8,224	1.30	$	2,066.9

^{_________________________________________}


^(*)	The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of May 31, 2019 and June 1, 2018 were $270.90 and $251.31, respectively.

Performance Shares

In the first quarter of fiscal 2019, the Executive Compensation Committee approved the 2019 Performance Share Program, the terms of which are similar to prior year programs that are still outstanding. For information regarding our Performance Shares Program including the terms, see “Note 11. Stock-Based Compensation” of our Annual Report on Form 10-K for the fiscal year ended November 30, 2018.

In the first quarter of fiscal 2019, the Executive Compensation Committee also certified the actual performance achievement of participants in the 2016 Performance Share Program. Actual performance resulted in participants achieving 200% of target or approximately 0.8 million shares. The shares granted and achieved under the 2016 Performance Share Program fully vested on the three-year anniversary of the grant on January 25, 2019, if not forfeited.

As of May 31, 2019, the shares awarded under our 2019, 2018 and 2017 Performance Share Programs remain outstanding and are yet to be achieved.

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(Unaudited)

The following table sets forth the summary of performance shares activity for the six months ended May 31, 2019 (in thousands):



	2019
	Shares Granted			Maximum Shares Eligible to Receive
Beginning outstanding balance	1,148			2,296
Awarded	722		⁽¹⁾	614
Achieved	(830	)	⁽²⁾	(830	)
Forfeited	(23	)		(46	)
Ending outstanding balance	1,017			2,034

^{_________________________________________}


⁽¹⁾	Included in the 0.7 million shares awarded during the six months ended May 31, 2019 were 0.4 million shares awarded for the final achievement of the 2016 Performance Share program. The remaining awarded shares were for the 2019 Performance Share Program.


⁽²⁾	Shares achieved under our 2016 Performance Share Program resulted from 200% achievement of target.

Employee Stock Purchase Plan Shares

There were no stock purchases under the Employee Stock Purchase Plan (“ESPP”) during the three months ended May 31, 2019 and June 1, 2018, respectively. The assumptions used to value employee stock purchase rights during the six months ended May 31, 2019 and June 1, 2018 were as follows:



	2019	2018
Expected life (in years)	0.5 - 2.0	0.5 - 2.0
Volatility	35% - 37%	26% - 27%
Risk free interest rate	2.47% - 2.63%	1.54% - 1.89%

The expected life of the ESPP shares is the average of the remaining purchase periods under each offering period.

Employees purchased 0.5 million shares at an average price of $129.23 and 0.7 million shares at an average price of $91.74 for the six months ended May 31, 2019 and June 1, 2018, respectively. The intrinsic value of shares purchased during the six months ended May 31, 2019 and June 1, 2018 was $51.2 million and $54.3 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.

Stock Options

The Executive Compensation Committee of Adobe’s Board of Directors eliminated the use of stock option grants for all employees and the Board of Directors effective fiscal 2012 and fiscal 2014, respectively. However, we may assume the stock option plans of certain companies we acquire. As of May 31, 2019 we had 0.2 million stock options outstanding.

Compensation Costs

As of May 31, 2019, there was $1.45 billion of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 2.4 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

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Total stock-based compensation costs included in our condensed consolidated statements of income for the three months ended May 31, 2019 and June 1, 2018 were as follows (in thousands):



	2019				2018
Income Statement Classifications	Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards
Cost of revenue—subscription	$	1,500	$	6,491	$	729	$	4,526
Cost of revenue—services and support	1,757		4,152		1,647		2,680
Research and development	8,771		86,123		5,301		63,608
Sales and marketing	10,087		58,525		5,443		42,747
General and administrative	2,189		24,705		1,350		17,346
Total	$	24,304	$	179,996	$	14,470	$	130,907

Total stock-based compensation costs included in our condensed consolidated statements of income for the six months ended May 31, 2019 and June 1, 2018 were as follows (in thousands):



	2019				2018
Income Statement Classifications	Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards
Cost of revenue—subscription	$	2,890	$	11,673	$	1,497	$	8,470
Cost of revenue—services and support	3,755		7,969		3,663		5,666
Research and development	17,216		161,942		10,649		117,681
Sales and marketing	20,440		110,772		10,763		81,595
General and administrative	5,470		46,860		2,830		38,088
Total	$	49,771	$	339,216	$	29,402	$	251,500

NOTE 10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss) and activity, net of related taxes, as of May 31, 2019 were as follows (in thousands):



	November 30, 2018			Increase / Decrease			Reclassification Adjustments				May 31, 2019
Net unrealized gains / losses on available-for-sale securities:
Unrealized gains on available-for-sale securities	$	44		$	883		$	(16	)		$	911
Unrealized losses on available-for-sale securities	(25,374		)	21,429			208				(3,737		)
Total net unrealized gains / losses on available-for-sale securities	(25,330		)	22,312			192			⁽¹⁾	(2,826		)
Net unrealized gains / losses on derivative instruments designated as hedging instruments	21,732			8,308			(16,872		)	⁽²⁾	13,168
Cumulative foreign currency translation adjustments	(144,532		)	(10,174		)	—				(154,706		)
Total accumulated other comprehensive income (loss), net of taxes	$	(148,130	)	$	20,446		$	(16,680	)		$	(144,364	)

^{_________________________________________}


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


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

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(Unaudited)

The following table sets forth the taxes related to each component of other comprehensive income for the three and six months ended May 31, 2019 and June 1, 2018 (in thousands):



	Three Months						Six Months
	2019			2018			2019			2018
Derivatives designated as hedging instruments:
Reclassification adjustments on derivative instruments	$	(98	)	$	(100	)	(193		)	(1,626		)
Subtotal derivatives designated as hedging instruments	(98		)	(100		)	(193		)	(1,626		)
Foreign currency translation adjustments	—			—			—			(1,742		)
Total taxes, other comprehensive income	$	(98	)	$	(100	)	$	(193	)	$	(3,368	)

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 shares in the open market or enter into structured repurchase agreements with third parties. In May 2018, our Board of Directors granted us an authority to repurchase up to $8 billion in common stock through the end of fiscal 2021.

During the six months ended May 31, 2019 and June 1, 2018, we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling $1.25 billion and $1 billion, respectively. We enter into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.

The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval and the average VWAP of our stock during the interval less the agreed upon discount.

During the six months ended May 31, 2019, we repurchased approximately 4.5 million shares at an average price of $254.19 through structured repurchase agreements entered into during fiscal 2018 and the six months ended May 31, 2019. During the six months ended June 1, 2018 we repurchased approximately 4.3 million shares at an average price of $208.69 through structured repurchase agreements entered into during fiscal 2017 and the six months ended June 1, 2018.

For the six months ended May 31, 2019, the prepayments were classified as treasury stock on our condensed consolidated balance sheets at the payment date, though only shares physically delivered to us by May 31, 2019 were excluded from the computation of earnings per share. As of May 31, 2019, $249.7 million of prepayment remained under this agreement.

Subsequent to May 31, 2019, as part of the May 2018 stock repurchase authority, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $750 million. Upon completion of the $750 million stock repurchase agreement, $5.85 billion remains under our May 2018 authority.

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(Unaudited)

NOTE 12. NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income per share for the three and six months ended May 31, 2019 and June 1, 2018 (in thousands, except per share data):



	Three Months				Six Months
	2019		2018		2019		2018
Net income	$	632,593	$	663,167	$	1,306,834	$	1,246,243
Shares used to compute basic net income per share	487,535		491,914		487,795		491,993
Dilutive potential common shares:
Unvested restricted stock units and performance share awards	4,141		6,212		4,931		7,019
ESPP and stock options	536		126		474		154
Shares used to compute diluted net income per share	492,212		498,252		493,200		499,166
Basic net income per share	$	1.30	$	1.35	$	2.68	$	2.53
Diluted net income per share	$	1.29	$	1.33	$	2.65	$	2.50

Anti-dilutive potential common shares⁽¹⁾	78		25		309		76

^{_________________________________________}


⁽¹⁾	Potential common stock equivalents not included in the calculation of diluted net income per share as the effect would have been anti-dilutive.

NOTE 13. COMMITMENTS AND CONTINGENCIES

Royalties

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

Indemnifications

In the ordinary course of business, we provide indemnifications of varying scope to customers and channel partners against claims of intellectual property infringement made by third parties arising from the use of our products and from time to time, we are subject to claims by our customers under these indemnification provisions. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.

To the extent permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

Legal Proceedings

In connection with disputes relating to the validity or alleged infringement of third-party intellectual property rights, including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation may be very costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully defended or resolved past litigation and disputes, we may not prevail in any ongoing or future litigation and disputes. Third-party intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from licensing certain of our products or offering certain of our services, subject us to injunctions restricting our sale of products or services, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers including contractual provisions under various license arrangements and service agreements.

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(Unaudited)

In addition to intellectual property disputes, we are subject to legal proceedings, claims and investigations in the ordinary course of business, including claims relating to commercial, employment and other matters. Some of these disputes and legal proceedings may include speculative claims for substantial or indeterminate amounts of damages. We consider all claims on a quarterly basis in accordance with GAAP and based on known facts assess whether potential losses are considered reasonably possible, probable and estimable. Based upon this assessment, we then evaluate disclosure requirements and whether to accrue for such claims in our financial statements. This determination is then reviewed and discussed with our Audit Committee and our independent registered public accounting firm.

We make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Unless otherwise specifically disclosed in this note, we have determined that no provision for liability nor disclosure is required related to any claim against us because: (a) there is not a reasonable possibility that a loss exceeding amounts already recognized (if any) may be incurred with respect to such claim; (b) a reasonably possible loss or range of loss cannot be estimated; or (c) such estimate is immaterial.

All legal costs associated with litigation are expensed as incurred. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us. It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.

In connection with our anti-piracy efforts, conducted both internally and through organizations such as the Business Software Alliance, from time to time we undertake litigation against alleged copyright infringers. Such lawsuits may lead to counter-claims alleging improper use of litigation or violation of other laws. We believe we have valid defenses with respect to such counter-claims; however, it is possible that our consolidated financial position, cash flows or results of operations could be negatively affected in any particular period by the resolution of one or more of these counter-claims.

NOTE 14. DEBT

Term Loan Credit Agreement

In October 2018, we entered into a credit agreement providing for an up to $2.25 billion senior unsecured term loan for the purpose of partially funding the purchase price for our acquisition of Marketo and the related fees and expenses incurred in connection with the acquisition. The Term Loan funds were received on October 31, 2018 upon closing of the acquisition and will mature 18 months following the initial funding date. In addition, we incurred issuance costs of $0.7 million which are amortized to interest expense over the term using the straight-line method. The Term Loan ranks equally with our other unsecured and unsubordinated indebtedness. There are no scheduled principal amortization payments prior to maturity and the Term Loan may be prepaid and terminated at our election at any time without penalty or premium. At our election, the Term Loan will bear interest at either (i) LIBOR plus a margin, based on our debt ratings, ranging from 0.500% to 1.000% or (ii) a base rate plus a margin, based on our debt ratings, ranging from 0.040% to 0.110%. Interest is payable periodically, in arrears, at the end of each interest period we elect.

For the six months ended May 31, 2019, we made interest payments of approximately $36.7 million.

The Term Loan credit agreement contains customary representations, warranties, affirmative and negative covenants, events of default and indemnification provisions in favor of the lenders similar to those contained in the Revolving Credit Agreement, including the financial covenant. As of May 31, 2019, we were in compliance with all covenants.

During the second quarter of fiscal 2019, we reclassified the carrying value of $2.25 billion as current debt on our condensed consolidated balance sheets, which represents the Term Loan, net of unamortized original issuance discount. We intend to refinance the Term Loan on or before the due date.

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(Unaudited)

Senior Notes

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

In June 2014, we entered into interest rate swaps with a total notional amount of $900 million designated as a fair value hedge related to our 2020 Notes. The interest rate swaps effectively convert the fixed interest rate on our 2020 Notes to a floating interest rate based on LIBOR. Under the terms of the swap, we will pay monthly interest at the one-month LIBOR interest rate plus a fixed number of basis points on the $900 million notional amount. In exchange, we will receive 4.75% fixed rate interest from the swap counterparties. The fair value of the interest rate swaps is included in the carrying value of our debt in the condensed consolidated balance sheets. See Note 6 for further details regarding our interest rate swap derivatives.

In January 2015, we issued $1 billion of 3.25% senior notes due February 1, 2025 (“2025 Notes”). Our proceeds were approximately $989.3 million which is net of an issuance discount of $10.7 million. In addition, we incurred issuance costs of $7.9 million. Both the discount and issuance costs are being amortized to interest expense over the term of the 2025 Notes using the effective interest method. The effective interest rate including the discount, issuance costs and interest rate agreement is 3.67%. Interest is payable semi-annually, in arrears on February 1 and August 1, and commenced on August 1, 2015.

During the first quarter of fiscal 2019, we reclassified the 2020 Notes as current debt in our condensed consolidated balance sheet. As of May 31, 2019, the carrying value of the 2020 Notes was $896.1 million which includes the fair value of the interest rate swap and is net of debt issuance costs. We intend to refinance the 2020 Notes on or before the due date.

As of May 31, 2019, our outstanding notes payable consist of the 2020 Notes and 2025 Notes (“Notes”) with a total carrying value of $1.89 billion which includes the fair value of the interest rate swap and is net of debt issuance costs. Based on quoted prices in inactive markets, the total fair value of the Notes was $1.95 billion as of May 31, 2019 and excludes the effect of the fair value hedge of the 2020 Notes for which we entered into interest rate swaps as described above.

The Notes rank equally with our other unsecured and unsubordinated indebtedness. We may redeem the Notes at any time, subject to a make-whole premium. In addition, upon the occurrence of certain change of control triggering events, we may be required to repurchase the Notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The Notes also include covenants that limit our ability to grant liens on assets and to enter into sale and leaseback transactions, subject to significant allowances. As of May 31, 2019, we were in compliance with all of the covenants.

For the six months ended May 31, 2019, we made semi-annual interest payments on our Notes totaling $37.6 million.

Subsequent to May 31, 2019, in anticipation of refinancing our Term Loan and 2020 Notes, we entered into interest rate 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 hedge the impact of changes in the benchmark interest rate to future interest payments and will be terminated upon debt issuance. See Note 6 for further details regarding our interest rate lock agreements.

Revolving Credit Agreement

In October 2018, we entered into a credit agreement (“Revolving Credit Agreement”), providing for a five-year $1 billion senior unsecured revolving credit facility, which replaced our previous five-year $1 billion senior unsecured revolving credit agreement dated as of March 2, 2012 (as amended, the “Prior Revolving Credit Agreement”). In addition, we incurred issuance costs of $0.8 million which is amortized to interest expense over the term using the straight-line method. The Revolving Credit Agreement provides for loans to Adobe and certain of its subsidiaries that may be designated from time to time as additional borrowers. Pursuant to the terms of the Revolving Credit Agreement, we may, subject to the agreement of lenders to provide additional commitments, obtain up to an additional $500 million in commitments, for a maximum aggregate commitment of $1.5 billion. At our election, loans under the Revolving Credit Agreement will bear interest at either (i) LIBOR plus a margin, based on our debt ratings, ranging from 0.585% to 1.015% or (ii) a base rate, which is defined as the highest of (a) the agent’s prime rate, (b) the federal funds effective rate plus 0.500% or (c) LIBOR plus 1.00% plus a margin, based on our debt ratings, ranging

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(Unaudited)

from 0.000% to 0.015%. In addition, facility fees determined according to our debt ratings are payable on the aggregate commitments, regardless of usage, quarterly in an amount ranging from 0.04% to 0.11% per annum. We are permitted to permanently reduce the aggregate commitment under the Revolving Credit Agreement at any time. Subject to certain conditions stated in the Revolving Credit Agreement, Adobe and any of its subsidiaries designated as additional borrowers may borrow, prepay and re-borrow amounts at any time during the term of the Revolving Credit Agreement.

The Revolving Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including a financial covenant, events of default and indemnification provisions in favor of the lenders. The negative covenants include restrictions regarding the incurrence of liens and indebtedness, certain merger and acquisition transactions, dispositions and other matters, all subject to certain exceptions. The financial covenant, based on a quarterly financial test, requires us not to exceed a maximum leverage ratio.

The facility will terminate and all amounts owing thereunder will be due and payable on the maturity date unless (a) the commitments are terminated earlier upon the occurrence of certain events, including an event of default, or (b) the maturity date is further extended upon our request, subject to the agreement of the lenders.

As of May 31, 2019, there were no outstanding borrowings under this Credit Agreement and we were in compliance with all covenants.

NOTE 15. NON-OPERATING INCOME (EXPENSE)

Non-operating income (expense) for the three and six months ended May 31, 2019 and June 1, 2018 included the following (in thousands):



	Three Months						Six Months
	2019			2018			2019			2018
Interest and other income (expense), net:
Interest income	$	16,278		$	25,771		$	32,349		$	48,401
Foreign exchange gains (losses)	(13,692		)	(14,222		)	(25,549		)	(20,111		)
Realized gains on fixed income investment	13			6			16			190
Realized losses on fixed income investment	(80		)	(81		)	(208		)	(386		)
Other	39			125			216			177
Interest and other income (expense), net	$	2,558		$	11,599		$	6,824		$	28,271
Interest expense	$	(40,577	)	$	(20,363	)	$	(81,170	)	$	(40,262	)
Investment gains (losses), net:
Realized investment gains	$	957		$	503		$	44,615		$	4,497
Realized investment losses	(130		)	—			(130		)	—
Unrealized investment gains	—			576			—			—
Unrealized investment losses	(1,583		)	—			(1,410		)	(422		)
Investment gains (losses), net	$	(756	)	$	1,079		$	43,075		$	4,075
Non-operating income (expense), net	$	(38,775	)	$	(7,685	)	$	(31,271	)	$	(7,916	)

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

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

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements, including statements regarding product plans, future growth, market opportunities, strategic initiatives, industry positioning, customer acquisition, the amount of recurring revenue and revenue growth. In addition, when used in this report, the words “will,” “expects,” “could,” “would,” “may,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “targets,” “estimates,” “looks for,” “looks to,” “continues” and similar expressions, as well as statements regarding our focus for the future, are generally intended to identify forward-looking statements. Each of the forward-looking statements we make in this report involves risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” in Part II, Item 1A of this report. You should carefully review the risks described herein and in other documents we file from time to time with the U.S. Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for fiscal 2018. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document, except as required by law.

BUSINESS OVERVIEW

Founded in 1982, Adobe Inc. is one of the largest and most diversified software companies in the world. We offer a line of products and services used by creative professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing and engaging with compelling content and experiences across personal computers, devices and media. We market our products and services directly to enterprise customers through our sales force and certain local field offices. We license our products to end users through app stores and our own website at www.adobe.com. We offer many of our products via a Software-as-a-Service (“SaaS”) model or a managed services model (both of which are referred to as hosted or cloud-based) as well as through term subscription and pay-per-use models. We also distribute certain products and services through a network of distributors, value-added resellers (“VARs”), systems integrators (“SIs”), independent software vendors (“ISVs”), retailers, software developers and original equipment manufacturers (“OEMs”). In addition, we license our technology to hardware manufacturers, software developers and service providers for use in their products and solutions. Our products run on personal and server-based computers, as well as on smartphones, tablets and other devices, depending on the product. We have operations in the Americas, Europe, Middle East and Africa (“EMEA”) and Asia-Pacific (“APAC”).

Adobe was originally incorporated in California in October 1983 and was reincorporated in Delaware in May 1997. Our executive offices and principal facilities are located at 345 Park Avenue, San Jose, California 95110-2704. Our telephone number is 408-536-6000 and our website is www.adobe.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC website at www.sec.gov. The information posted to our website is not incorporated into this Quarterly Report on Form 10-Q.

OPERATIONS OVERVIEW

For our second quarter of fiscal 2019, we reported strong financial results consistent with the continued execution of our long-term plans for our two strategic growth areas, Digital Media and Digital Experience, while continuing to market and license a broad portfolio of products and solutions.

In our Digital Media segment, we are a market leader with Creative Cloud, our subscription-based offering which provides desktop tools, mobile apps and cloud-based services for designing, creating and publishing rich and immersive content. Creative Cloud delivers value with deep, cross-product integration, frequent product updates and feature enhancements, cloud-enabled services including storage and syncing of files across users’ machines, access to marketplace, social and community-based features with our Adobe Stock and Behance services, app creation capabilities, tools which assist with enterprise deployments and team collaboration, and affordable pricing for cost-sensitive customers.

We offer Creative Cloud for individuals, students, teams and enterprises. We expect Creative Cloud will drive sustained long-term revenue growth through a continued expansion of our customer base by acquiring new users on account of low cost of entry and delivery of additional features and value to Creative Cloud, as well as keeping existing customers current on our latest release. We have also built out a marketplace for Creative Cloud subscribers to enable the delivery and purchase of stock content in our Adobe Stock service. Overall, our strategy with Creative Cloud is designed to enable us to increase our revenue with users, attract more new customers, and grow our recurring and predictable revenue stream that is recognized ratably.

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

We are also a market leader with our Adobe Document Cloud offerings built around our Adobe Acrobat family of products, including Adobe Acrobat Reader DC, and a set of integrated cloud-based document services, including Adobe Sign. Acrobat provides reliable creation and exchange of electronic documents, regardless of platform or application source type. Document Cloud, which we believe enhances the way people manage critical documents at home, in the office and across devices, includes Adobe Acrobat DC and Adobe Sign, and a set of integrated services enabling users to create, review, approve, sign and track documents whether on a desktop or mobile device. Adobe Acrobat DC, with a touch-enabled user interface, is offered both through subscription and perpetual licenses.

Annualized Recurring Revenue (“ARR”) is currently the key performance metric our management uses to assess the health and trajectory of our overall Digital Media segment. ARR should be viewed independently of revenue, deferred revenue and unbilled deferred revenue as ARR is a performance metric and is not intended to be combined with any of these items. We adjust our reported ARR on an annual basis to reflect any material exchange rates changes. Our reported ARR results in fiscal 2019 are based on currency rates set at the start of fiscal 2019 and held constant throughout the year. We calculate ARR as follows:



Creative ARR	Annual Value of Creative Cloud Subscriptions and Services + Annual Creative ETLA Contract Value
Document Cloud ARR	Annual Value of Document Cloud Subscriptions and Services + Annual Document Cloud ETLA Contract Value
Digital Media ARR	Creative ARR + Document Cloud ARR

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. We began to report our financial results for fiscal 2019 under the new revenue standard. The impact of the adoption was not significant to our results of operations.

Creative ARR exiting the second quarter of fiscal 2019 was $6.55 billion, up from $5.92 billion at the end of fiscal 2018. Document Cloud ARR exiting the second quarter of fiscal 2019 was $921 million, up from $791 million at the end of fiscal 2018. Total Digital Media ARR grew to $7.47 billion at the end of the second quarter of fiscal 2019, up from $6.71 billion at the end of fiscal 2018.

Our success in driving growth in ARR has positively affected our revenue growth. Creative revenue in the second quarter of fiscal 2019 was $1.59 billion, up from $1.30 billion in the second quarter of fiscal 2018, representing 22% year-over-year growth. Document Cloud revenue in the second quarter of fiscal 2019 was $296.2 million, up from $243.0 million in the second quarter of fiscal 2018 as we continue to transition Document Cloud to a subscription-based model. Total Digital Media segment revenue grew to $1.89 billion in the second quarter of fiscal 2019, up from $1.55 billion in the second quarter of fiscal 2018, representing 22% year-over-year growth.

We are a market leader in the fast-growing category addressed by our Digital Experience segment. Our Digital Experience business provides comprehensive solutions that include analytics, social marketing, targeting, media optimization, digital experience management, cross-channel campaign management, marketing automation, audience management, commerce, premium video delivery and monetization. These comprehensive solutions enable marketers to measure, personalize and optimize marketing campaigns and digital experiences across channels for optimal marketing performance.

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Our hierarchy of solutions in the Digital Experience segment, available in our Adobe Experience Cloud, consists of the following cloud offerings:


•	Adobe Advertising Cloud—delivers an end-to-end platform for managing advertising across traditional TV and digital formats, and simplifies the delivery of video, display and search advertising across channels and screens.

•

Adobe Analytics Cloud—enables businesses to move from insights to actions in real time by uniquely integrating audiences as the core system of intelligence for the enterprise; makes data available across all Adobe clouds through the capture, aggregation, rationalization and understanding of vast amounts of disparate data and then translating that data into singular customer profiles; includes Adobe Analytics and Adobe Audience Manager.


•	Adobe Marketing Cloud—provides an integrated set of solutions to help marketers differentiate their brands and engage their customers, helping businesses manage, personalize, and orchestrate campaigns and customer journeys; includes Adobe Experience Manager (“AEM”), Adobe Campaign, Adobe Target, Marketo Engagement Platform and Adobe Primetime.


•	Adobe Commerce Cloud—provides digital commerce, order management and predictive intelligence based on a unified commerce platform enabling shopping experiences across a wide array of industries.

In addition to chief marketing officers, chief revenue officers and digital marketers, users of our Adobe Experience Cloud solutions include advertisers, campaign managers, digital marketers, publishers, data analysts, content managers, social marketers and marketing executives. These customers often are involved in workflows that utilize other Adobe products, such as our Digital Media offerings. By combining the creativity of our Digital Media business with the science of our Digital Experience business, we help our customers to more efficiently and effectively make, manage, measure and monetize their content across every channel with an end-to-end workflow and feedback loop.

We utilize a direct sales force to market and license our Adobe Experience Cloud solutions, as well as an extensive ecosystem of partners, including marketing agencies, systems integrators and independent software vendors that help license and deploy our solutions to their customers. We have made significant investments to broaden the scale and size of all of these routes to market, and our recent financial results reflect the success of these investments.

We achieved record Adobe Experience Cloud revenue of $783.5 million in the second quarter of fiscal 2019, representing 34% year-over-year growth. Driving the increase in Adobe Experience Cloud revenue was the increase in subscription revenue across our offerings which grew to $654.0 million in the second quarter of fiscal 2019 from $469.4 million in the second quarter of fiscal 2018, representing 39% year-over-year growth. Largely contributing to the increase in Digital Experience subscription revenue was revenue associated with Marketo’s Engagement Platform offerings and Magento’s Commerce Cloud offerings. We expect that the addition of Marketo and Magento, and continued demand across our portfolio of Adobe Experience Cloud solutions, will drive revenue growth in future years.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our condensed consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.

We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, business combinations and income taxes have the greatest potential impact on our condensed consolidated financial statements. These areas are key components of our results of operations and are based on complex rules requiring us to make judgments and estimates and consequently, we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

Other than the addition of revenue recognition to our critical accounting policies below, there have been no significant changes in our critical accounting policies and estimates during the six months ended May 31, 2019, as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended November 30, 2018.

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Revenue Recognition

We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition discussed above, and those included in our Annual Report on Form 10-K, have the greatest potential impact on our condensed consolidated financial statements. These areas are key components of our results of operations and are based on complex rules requiring us to make judgments and estimates, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

Recent Accounting Pronouncements

See Note 1 of our notes to condensed consolidated financial statements for information regarding recent accounting pronouncements that are of significance or potential significance to us.

RESULTS OF OPERATIONS

Our financial results for the second quarter of fiscal 2019 are presented in accordance with the new revenue standard that was adopted under the modified retrospective method at the beginning of fiscal 2019. Prior period results have not been restated which limits the comparability of our results of operations for the second quarter of fiscal 2019 when compared to the year-ago period. See Note 1 of our notes to condensed consolidated financial statements for further details about our recent adoption.

Financial Performance Summary


•	Total Digital Media ARR of approximately $7.47 billion as of May 31, 2019 increased by $763 million, or 11%, from $6.71 billion as of November 30, 2018. The change in our Digital Media ARR is primarily due to stronger new user adoption of our Creative Cloud and Adobe Document Cloud offerings.


•	Creative revenue during the three months ended May 31, 2019 of $1.59 billion increased by $290.6 million, or 22% compared to the year-ago period. The increase was primarily due to the increase in subscription revenue associated with our Creative Cloud offerings.


•	Adobe Experience Cloud revenue of $783.5 million during the three months ended May 31, 2019 increased by $197.6 million, or 34%, compared to the year-ago period. The increase was primarily due to the increase in subscription revenue driven by the addition of Marketo and Magento, which we acquired in the later part of fiscal 2018.


•	Our total deferred revenue of $3.13 billion as of May 31, 2019 increased by $80.5 million, or 3%, from $3.05 billion as of November 30, 2018 primarily due to increases in new contracts and the timing of renewals related to our Digital Experience offerings and acquired deferred revenue from Marketo and Magento.


•	Cost of revenue of $407.5 million during the three months ended May 31, 2019 increased by $126.1 million, or 45%, compared to the year-ago period primarily due to increases in amortization of purchased intangibles and hosting services and data center costs.

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•

Operating expenses of $1.59 billion during the three months ended May 31, 2019 increased by $371.7 million, or 31%, compared to the year-ago period primarily due to increases in base compensation and related benefits costs and stock-based compensation expense associated with headcount growth, and marketing spend. Contributing to these increases were the additions of Magento and Marketo in the later part of fiscal 2018.


•	Net income of $632.6 million during the three months ended May 31, 2019 decreased by $30.6 million, or 5%, compared to the year-ago period primarily due to increases in provision for income taxes and interest expense.


•	Net cash flow from operations of $2.12 billion during the six months ended May 31, 2019 increased by $156.8 million, or 8%, compared to the year-ago period primarily due to higher net income, coupled with a smaller increase in taxes payable.

Revenue for the Three and Six Months Ended May 31, 2019 and June 1, 2018



(dollars in millions)	Three Months								Six Months
	2019			2018			% Change		2019			2018			% Change
Subscription	$	2,456.1		$	1,923.1		28	%	$	4,761.0		$	3,716.5		28	%
Percentage of total revenue	89		%	88		%			89		%	87		%
Product	152.8			151.0			1	%	323.4			322.6			*
Percentage of total revenue	6		%	7		%			6		%	8		%
Services and support	135.4			121.3			12	%	260.8			235.2			11	%
Percentage of total revenue	5		%	5		%			5		%	5		%
Total revenue	$	2,744.3		$	2,195.4		25	%	$	5,345.2		$	4,274.3		25	%

^{_________________________________________}


^(*)	Percentage is less than 1%.

Subscription Revenue by Segment

Our subscription revenue is comprised primarily of fees we charge for our subscription and hosted service offerings including Creative Cloud and certain of our Adobe Experience Cloud and Document Cloud services. We recognize subscription revenue ratably over the term of our agreements with customers, beginning with commencement of service.

We have the following reportable segments: Digital Media, Digital Experience and Publishing. Subscription revenue by reportable segment for the three and six months ended May 31, 2019 and June 1, 2018 is as follows:



(dollars in millions)	Three Months						Six Months
	2019		2018		% Change		2019		2018		% Change
Digital Media	$	1,773.7	$	1,425.9	24	%	$	3,437.2	$	2,760.6	25	%
Digital Experience	654.0		469.4		39	%	1,266.0		900.3		41	%
Publishing	28.4		27.8		2	%	57.8		55.6		4	%
Total subscription revenue	$	2,456.1	$	1,923.1	28	%	$	4,761.0	$	3,716.5	28	%

Our services and support revenue is comprised of consulting, training and maintenance and support, primarily related to the licensing of our enterprise products and the sale of our cloud-hosted Adobe Experience Cloud services. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. Our maintenance and support offerings, which entitle customers to receive desktop product upgrades and enhancements or technical support, depending on the offering, are generally recognized ratably over the term of the arrangement as we satisfy the performance obligations to our customers.

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Segment Information



(dollars in millions)	Three Months								Six Months
	2019			2018			% Change		2019			2018			% Change
Digital Media	$	1,890.2		$	1,546.4		22	%	$	3,666.8		$	3,006.9		22	%
Percentage of total revenue	69		%	70		%			69		%	70		%
Digital Experience	783.5			586.0			34	%	1,526.8			1,140.1			34	%
Percentage of total revenue	28		%	27		%			28		%	27		%
Publishing	70.6			63.0			12	%	151.6			127.3			19	%
Percentage of total revenue	3		%	3		%			3		%	3		%
Total revenue	$	2,744.3		$	2,195.4		25	%	$	5,345.2		$	4,274.3		25	%

Digital Media

Revenue from Digital Media increased $343.8 million and $659.9 million during the three and six months ended May 31, 2019, as compared to the three and six months ended June 1, 2018 driven by increases in revenue associated with our Creative and Document Cloud offerings.

Revenue associated with our Creative offerings, which includes our Creative Cloud, perpetually licensed Creative and stock photography offerings, increased during the three and six months ended May 31, 2019 as compared to the three and six months ended June 1, 2018 primarily due to an increase in subscription revenue across our Creative Cloud offerings driven by the increase in net new subscriptions.

Adobe Document Cloud revenue, which includes our Acrobat product family and Adobe Sign service, increased during the three and six months ended May 31, 2019 as compared to the year ago periods primarily due to increases in Document Cloud subscription revenue.

Digital Experience

Revenue from Digital Experience increased $197.5 million and $386.7 million during the three and six months ended May 31, 2019, as compared to the three and six months ended June 1, 2018 primarily due to the revenue associated with our Marketo Engagement Platform and Magento Commerce Cloud offerings which were both acquired in the later part of fiscal 2018.

Geographical Information



(dollars in millions)	Three Months								Six Months
	2019			2018			% Change		2019			2018			% Change
Americas	$	1,599.2		$	1,239.6		29	%	$	3,109.1		$	2,410.2		29	%
Percentage of total revenue	58		%	57		%			58		%	57		%
EMEA	729.3			621.8			17	%	1,432.3			1,209.1			18	%
Percentage of total revenue	27		%	28		%			27		%	28		%
APAC	415.8			334.0			24	%	803.8			655.0			23	%
Percentage of total revenue	15		%	15		%			15		%	15		%
Total revenue	$	2,744.3		$	2,195.4		25	%	$	5,345.2		$	4,274.3		25	%

Overall revenue during the three and six months ended May 31, 2019 increased in all geographic regions as compared to the three and six months ended June 1, 2018 primarily due to increases in Digital Media and Digital Experience revenue. Within each geographic region, the fluctuations in revenue by reportable segment were attributable to the factors noted in the segment information above.

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Included in the overall change in revenue for the three and six months ended May 31, 2019 were impacts associated with foreign currency as shown below. Our currency hedging program is used to mitigate a portion of the foreign currency impact to revenue.



(in millions)	Three Months			Six Months
Revenue impact:	Increase/(Decrease)
Euro	$	(22.5	)	$	(29.2	)
British Pound	(7.4		)	(11.2		)
Japanese Yen	(2.9		)	(1.5		)
Other currencies	(12.5		)	(18.2		)
Total revenue impact	(45.3		)	(60.1		)
Hedging impact:
Euro	7.3			13.2
British Pound	1.0			2.7
Japanese Yen	0.7			1.6
Total hedging impact	9.0			17.5
Total impact	$	(36.3	)	$	(42.6	)

During the three and six months ended May 31, 2019, the U.S. Dollar strengthened against EMEA and other currencies as compared to the three and six months ended June 1, 2018, which decreased revenue in U.S. Dollar equivalents. The foreign currency impact to revenue was offset in part by hedging gains primarily from our EMEA currencies hedging program.

Cost of Revenue for the Three and Six Months Ended May 31, 2019 and June 1, 2018



(dollars in millions)	Three Months								Six Months
	2019			2018			% Change		2019			2018			% Change
Subscription	$	296.5		$	186.3		59	%	$	584.5		$	351.0		67	%
Percentage of total revenue	11		%	8		%			11		%	8		%
Product	9.3			10.8			(14	)%	21.5			23.7			(9	)%
Percentage of total revenue	*			*					*			1		%
Services and support	101.7			84.2			21	%	198.8			165.5			20	%
Percentage of total revenue	4		%	4		%			4		%	4		%
Total cost of revenue	$	407.5		$	281.3		45	%	$	804.8		$	540.2		49	%

^{_________________________________________}


^(*)	Percentage is less than 1%.

Subscription

Cost of subscription revenue consists of third-party royalties and expenses related to operating our network infrastructure, including depreciation expense and operating lease payments associated with computer equipment, data center costs, salaries and related expenses of network operations, implementation, account management and technical support personnel, amortization of certain intangible assets and allocated overhead. We enter into contracts with third parties for hosting services and use of data center facilities. Our data center costs largely consist of the amounts we pay to these third parties for rack space, power and similar items. Cost of subscription revenue also includes media costs related to impressions purchased from third-party ad inventory sources for our Advertising Cloud offerings.

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Cost of subscription revenue increased during the three and six months ended May 31, 2019 as compared to the three and six months ended June 1, 2018 due to the following:



	% Change 2019-2018 QTD		% Change 2019-2018 YTD
Amortization of purchased intangibles	20	%	23	%
Hosting services and data center costs	14		15
Media costs	4		6
Royalty costs	6		5
Incentive compensation, cash and stock-based	4		4
Base compensation and related benefits associated with headcount	5		5
Software licenses	2		3
Various individually insignificant items	4		6
Total change	59	%	67	%

Amortization of purchased intangibles increased during the three and six months ended May 31, 2019 as compared to the three and six months ended June 1, 2018 primarily due to amortization of intangible assets purchased through our acquisitions of Magento and Marketo in the later part of fiscal 2018. Hosted services and data center costs increased during the same period due to higher hosting costs for Digital Experience, including costs associated with our Magento and Marketo offerings.

Product

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

Cost of product revenue decreased during the three and six months ended May 31, 2019 as compared to the three and six months ended June 1, 2018 primarily due to decreases in localization costs.

Services and Support

Cost of services and support revenue is primarily comprised of employee-related costs and associated costs incurred to provide consulting services, training and product support.

Cost of services and support revenue increased during the three and six months ended May 31, 2019 as compared to the three and six months ended June 1, 2018 due to the following:



	% Change 2019-2018 QTD		% Change 2019-2018 YTD
Base compensation and related benefits associated with headcount	11	%	10	%
Incentive compensation, cash and stock-based	7		8
Professional and consulting fees	(1	)	(1	)
Various individually insignificant items	4		3
Total change	21	%	20	%

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Operating Expenses for the Three and Six Months Ended May 31, 2019 and June 1, 2018



(dollars in millions)	Three Months								Six Months
	2019			2018			% Change		2019			2018			% Change
Research and development	$	476.0		$	374.1		27	%	$	940.6		$	722.9		30	%
Percentage of total revenue	17		%	17		%			18		%	17		%
Sales and marketing	848.9			646.2			31	%	1,630.5			1,227.1			33	%
Percentage of total revenue	31		%	29		%			31		%	29		%
General and administrative	219.3			178.0			23	%	435.4			348.5			25	%
Percentage of total revenue	8		%	8		%			8		%	8		%
Amortization of purchased intangibles	43.0			17.2			**		89.6			34.3			**
Percentage of total revenue	2		%	1		%			2		%	1		%
Total operating expenses	$	1,587.2		$	1,215.5		31	%	$	3,096.1		$	2,332.8		33	%

^{_________________________________________}


^(**)	Percentage is not meaningful.

Research and Development

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

Research and development expenses increased during the three and six months ended May 31, 2019 as compared to the three and six months ended June 1, 2018 due to the following:



	% Change 2019-2018 QTD		% Change 2019-2018 YTD
Incentive compensation, cash and stock-based	12	%	12	%
Base compensation and related benefits associated with headcount	9		10
Professional and consulting fees	4		4
Various individually insignificant items	2		4
Total change	27	%	30	%

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

Sales and Marketing

Sales and marketing expenses consist primarily of salary and benefit expenses, amortization of contract acquisitions costs, including sales commissions, travel expenses and related facilities costs for our sales, marketing, order management and global supply chain management personnel. Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs.

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Sales and marketing expenses increased during the three and six months ended May 31, 2019 as compared to the three and six months ended June 1, 2018 due to the following:



	% Change 2019-2018 QTD		% Change 2019-2018 YTD
Marketing spend related to campaigns, events and overall marketing efforts	12	%	11	%
Base compensation and related benefits associated with headcount	9		10
Incentive compensation, cash and stock-based	5		5
Professional and consulting fees	1		2
Amortization of contract acquisition costs, including sales commissions	1		1
Various individually insignificant items	3		4
Total change	31	%	33	%

General and Administrative

General and administrative expenses consist primarily of compensation and benefit expenses, travel expenses and related facilities costs for our finance, facilities, human resources, legal, information services and executive personnel. General and administrative expenses also include outside legal and accounting fees, provision for bad debts, expenses associated with computer equipment and software used in the administration of the business, charitable contributions and various forms of insurance.

General and administrative expenses increased during the three and six months ended May 31, 2019 as compared to the three and six months ended June 1, 2018 due to the following:



	% Change 2019-2018 QTD		% Change 2019-2018 YTD
Professional and consulting fees	5	%	9	%
Incentive compensation, cash and stock-based	7		6
Base compensation and related benefits associated with headcount	4		4
Software licenses	1		2
Various individually insignificant items	6		4
Total change	23	%	25	%

Amortization of Purchased Intangibles

Amortization expenses increased during the three and six months ended May 31, 2019 as compared to the three and six months ended June 1, 2018 primarily due to amortization expense associated with intangible assets purchased through our acquisitions of Marketo and Magento in the later part of fiscal 2018.

Non-Operating Income (Expense), Net for the Three and Six Months Ended May 31, 2019 and June 1, 2018



(dollars in millions)	Three Months								Six Months
	2019			2018			% Change		2019			2018			% Change
Interest and other income (expense), net	$	2.6		$	11.6		(78	)%	$	6.8		$	28.3		(76	)%
Percentage of total revenue	*			1		%			*			1		%
Interest expense	(40.6		)	(20.4		)	99	%	(81.2		)	(40.3		)	101	%
Percentage of total revenue	(1		)%	(1		)%			(2		)%	(1		)%
Investment gains (losses), net	(0.8		)	1.1			**		43.1			4.1			**
Percentage of total revenue	*			*					1		%	*
Total non-operating income (expense), net	$	(38.8	)	$	(7.7	)	**		$	(31.3	)	$	(7.9	)	**

^{_________________________________________}


^(*)	Percentage is less than 1%.


^(**)	Percentage is not meaningful.

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Interest and Other Income (Expense), Net

Interest and other income (expense), net consists primarily of interest earned on cash, cash equivalents and short-term fixed income investments. Interest and other income (expense), net also includes gains and losses on fixed income investments and foreign exchange gains and losses other than any gains recorded to revenue from our hedging programs.

Interest and other income (expense), net decreased during the three and six months ended May 31, 2019 as compared to the three and six months ended June 1, 2018 primarily due to lower average invested balances.

Interest Expense

Interest expense represents interest associated with our Term Loan, senior notes and interest rate swaps. Interest on our Term Loan is payable periodically at the end of each interest period, whereas interest on our senior notes is payable semi-annually, in arrears, on February 1 and August 1. Floating interest payments on the interest rate swaps are paid monthly. The fixed-rate interest receivable on the swaps is received semi-annually concurrent with the senior notes interest payments. See Notes 6 and 14 of our notes to condensed consolidated financial statements for further details regarding our senior notes and interest rate swaps.

Interest expense increased during the three and six months ended May 31, 2019 as compared to the three and six months ended June 1, 2018 primarily due to interest on our Term Loan which was entered into in the fourth quarter of fiscal 2018.

Investment Gains (Losses), Net

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

Investment gains increased during the six months ended May 31, 2019 as compared to the six months ended June 1, 2018 primarily due to the gain recognized upon our acquisition of the remaining interest in Allegorithmic in January 2019, which was accounted for as an equity-method investment immediately before the acquisition. See Note 3 of our notes to condensed consolidated financial statements for further details regarding our acquisition of Allegorithmic.

Provision for Income Taxes for the Three and Six Months Ended May 31, 2019 and June 1, 2018



(dollars in millions)	Three Months								Six Months
	2019			2018			% Change		2019			2018			% Change
Provision	$	78.2		$	27.6		183	%	$	106.3		$	147.1		(28	)%
Percentage of total revenue	3		%	1		%			2		%	3		%
Effective tax rate	11		%	4		%			8		%	11		%

Our effective tax rate increased by 7 percentage points for the three months ended May 31, 2019, as compared to the three months ended June 1, 2018, primarily due to U.S. federal and state taxes associated with our current year international earnings resulting from the international provisions of the Tax Cuts and Jobs Act (“Tax Act”) effective in fiscal 2019. In addition, the effective tax rate for the three months ended June 1, 2018 was lower due to a change to our corporate tax structure from which we serve our foreign customers that provided us the ability to deduct more expenses against our earnings in the U.S., offset in part by an adjustment to the Tax Act provisional accounting.

Our effective tax rate decreased by 3 percentage points for the six months ended May 31, 2019, as compared to the six months ended June 1, 2018, as the effective tax rate for the six months ended June 1, 2018 included provisional accounting expenses for the effects of the Tax Act adoption, offset in part by the increase due to the above noted items.

The Tax Act enacted on December 22, 2017 lowered the statutory federal corporate income tax rate from 35% to 21% effective on January 1, 2018. Beginning in our fiscal 2019, the annual statutory federal corporate tax rate is 21% and certain international provisions of the Tax Act, such as a tax on global intangible low-tax income, a base erosion and anti-abuse tax, and a special tax deduction for foreign-derived intangible income, take effect. The U.S. Treasury Department has issued proposed regulations that could impact the calculation of taxes related to these provisions and which are anticipated to be applicable on a retrospective basis. While the Company continues to evaluate the impact, such regulations have not been finalized and are subject to change. We will account for new regulations in the period of enactment.

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We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we considered all available positive and negative evidence, including our past operating results, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. On the basis of this evaluation, we continue to maintain a valuation allowance related primarily to the realizability of state and foreign credits of $191.8 million as of the period ended May 31, 2019.

We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. The Tax Act provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017, including certain earnings that were not subject to the one-time transition or global intangible low-tax income tax. As we repatriate the undistributed foreign earnings for use in the U.S., the distributions will generally not be subject to further U.S. federal tax.

Accounting for Uncertainty in Income Taxes

The gross liabilities for unrecognized tax benefits excluding interest and penalties were $197.8 million and $156.2 million as of May 31, 2019 and June 1, 2018, respectively. If the total unrecognized tax benefits at May 31, 2019 and June 1, 2018 were recognized in the future, $135.5 million and $99.8 million would decrease the respective effective tax rates.

The combined amount of accrued interest and penalties related to tax positions taken on our tax returns were approximately $25.8 million and $22.9 million for the three months ended May 31, 2019 and June 1, 2018, respectively. These amounts were included in long-term income taxes payable in their respective years.

The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. These events could cause large fluctuations in the balance sheet classification of current and long-term assets and liabilities. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from $0 to approximately $40.0 million.

In addition, in the United States, the European Commission, countries in the European Union and other countries where we do business, we are subject to potential changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to corporate multinationals such as Adobe. These countries and other governmental bodies have or could make unprecedented assertions about how taxation is determined in their jurisdictions that are contrary to the way in which we have interpreted and historically applied the rules and regulations described above in our income tax returns filed in such jurisdictions.

Moreover, we are subject to the continual examination of our income tax returns by the U.S. Internal Revenue Service and other domestic and foreign tax authorities. These tax examinations are expected to focus on our intercompany transfer pricing practices as well as other matters. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for adjustments that may result from these examinations.

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LIQUIDITY AND CAPITAL RESOURCES

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



	As of
(in millions)	May 31, 2019			November 30, 2018
Cash and cash equivalents	$	2,082.9		$	1,642.8
Short-term investments	$	1,396.1		$	1,586.2
Working capital	$	(2,344.5	)	$	555.9
Stockholders’ equity	$	9,931.7		$	9,362.1

Working Capital

Working capital as of May 31, 2019 and November 30, 2018 was $2.34 billion of a deficit and $555.9 million of a surplus, respectively. The decrease was primarily due to the reclassification of $3.15 billion total carrying value of our $2.25 billion term loan due April 30, 2020 (“Term Loan”) and $900 million 4.75% senior notes due February 1, 2020 (“2020 Notes”) to current liabilities. We intend to refinance our Term Loan and 2020 Notes on or before the due dates.

A summary of our cash flows is as follows:



	Six Months Ended
(in millions)	May 31, 2019			June 1, 2018
Net cash provided by operating activities	$	2,122.7		$	1,966.0
Net cash used for investing activities	(121.8		)	(26.1		)
Net cash used for financing activities	(1,556.0		)	(1,258.6		)
Effect of foreign currency exchange rates on cash and cash equivalents	(4.8		)	0.6
Net increase in cash and cash equivalents	$	440.1		$	681.9

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

Cash Flows from Operating Activities

Net cash provided by operating activities of $2.12 billion for the six months ended May 31, 2019 was primarily comprised of net income plus the net effect of non-cash items. The primary working capital sources of cash were net income coupled with increases in deferred revenue and accrued expenses, which were offset in large part by cash outflows due to an increase in prepaid expenses and other assets. The increase in deferred revenue was primarily driven by an increase in Digital Experience hosted services as well as increases related to Marketo and Magento. The increase in accrued expenses was primarily driven by increased accruals related to our employee stock purchase plan and marketing activities. The primary working capital use of cash was due to sales commissions paid and capitalized, increases in prepaid expenses driven by the timing of billings and payments associated with certain vendors, and increases in prepaid payroll related to employee benefits.

Cash Flows from Investing Activities

Net cash used for investing activities of $121.8 million for the six months ended May 31, 2019 was primarily due to purchases of property and equipment and our acquisition of the remaining equity interest in Allegorithmic. We reclassified the deposit payment made in the first quarter of fiscal 2019 related to the procurement of a corporate jet to property and equipment upon our completion of the purchase during the second quarter of fiscal 2019. These cash outflows were offset primarily by proceeds from sales and maturities of short-term investments, net of purchases. See Note 3 of our notes to condensed consolidated financial statements for further details regarding our acquisition of Allegorithmic.

Cash Flows from Financing Activities

Net cash used for financing activities of $1.56 billion for the six months ended May 31, 2019 was primarily due to payments for our treasury stock repurchases and taxes related to net share settlement of equity awards, which were offset by proceeds from reissuance of treasury stock. See the section titled “Stock Repurchase Program” discussed below.

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We expect to continue our investing activities, including short-term and long-term investments, facilities expansion and purchases of computer systems for research and development, sales and marketing, product support and administrative staff. Furthermore, cash reserves may be used to repurchase stock under our stock repurchase program and to strategically acquire companies, products or technologies that are complementary to our business.

Other Liquidity and Capital Resources Considerations

Our existing cash, cash equivalents and investment balances may fluctuate during fiscal 2019 due to changes in our planned cash outlay, including changes in incremental costs such as direct and integration costs related to our acquisitions.

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

We have a $1 billion senior unsecured revolving credit agreement (“Revolving Credit Agreement”) with a syndicate of lenders, providing for loans to us and certain of our subsidiaries through October 17, 2023. As of May 31, 2019, there were no outstanding borrowings under this Credit Agreement and the entire $1 billion credit line remains available for borrowing.

As of May 31, 2019, we have a $2.25 billion Term Loan outstanding due April 30, 2020 and $1.90 billion senior notes outstanding, consisting of the 2020 Notes and $1 billion of 3.25% senior notes due February 1, 2025 (“2025 Notes,” and together with the 2020 Notes, “Notes”). The Notes and Term Loan rank equally with our other unsecured and unsubordinated indebtedness.

During the first quarter of fiscal 2019, we reclassified the 2020 Notes as current debt in our condensed consolidated balance sheets. As of May 31, 2019, the carrying value of the 2020 Notes was $896.1 million which includes the fair value of the interest rate swap and is net of debt issuance costs. During the second quarter of fiscal 2019, we reclassified the Term Loan with a carrying value of $2.25 billion, net of unamortized original issuance discount, as current debt on our condensed consolidated balance sheets. We intend to refinance the Term Loan and 2020 Notes on or before the due dates.

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

Stock Repurchase Program

During the six months ended May 31, 2019 and June 1, 2018, we entered into several structured stock repurchase agreements with large financial institutions, whereupon we provided them with prepayments totaling $1.25 billion and $1 billion, respectively. We enter into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the expected foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.

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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Our principal commitments as of May 31, 2019 consist of obligations under operating leases, royalty agreements and various service agreements. Except as discussed below, there have been no other material changes in those obligations during the six months ended May 31, 2019. See Notes 13 and 14 of our notes to condensed consolidated financial statements for more detailed information regarding our contractual commitments.

Purchase Obligations

During the second fiscal quarter of 2019, we amended two existing vendor agreements that include an aggregated incremental minimum purchase commitment of $1.74 billion through May 2024. There were no other significant changes in our purchase obligations during the six months ended May 31, 2019.

Transition Taxes Liability

As a result of the Tax Act enacted on December 22, 2017, an accrued transition tax liability of approximately $0.5 billion is payable in installments through fiscal 2026. The Tax Act provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017, including certain earnings that were not subject to the one-time transition or global intangible low-tax income tax. As we repatriate the undistributed foreign earnings for use in the U.S., the distributions will generally not be subject to further U.S. federal tax.

Term Loan

As of May 31, 2019, our Term Loan’s carrying value was $2.25 billion. At our election, the Term Loan will bear interest at either (i) the London Interbank Offered Rate (“LIBOR”) plus a margin, based on our debt ratings, ranging from 0.500% to 1.000% or (ii) a base rate plus a margin, based on our debt ratings, ranging from 0.040% to 0.110%. Interest is payable periodically, in arrears, at the end of each interest period we elect. Based on the LIBOR rate at May 31, 2019, our estimated maximum commitment for interest payments was $60.1 million for the remaining duration of the Term Loan.

Senior Notes

As of May 31, 2019, the carrying value of our Notes payable was $1.89 billion. Interest on our Notes is payable semi-annually, in arrears on February 1 and August 1. At May 31, 2019, our maximum commitment for interest payments was $237.8 million for the remaining duration of our Notes.

Covenants

Our Term Loan and Revolving Credit Agreement contain similar financial covenants requiring us not to exceed a maximum leverage ratio. As of May 31, 2019, we were in compliance with this covenant. We believe this covenant will not impact our credit or cash in the coming fiscal year or restrict our ability to execute our business plan. Our senior notes do not contain any financial covenants.

Under the terms of our Term Loan and Revolving Credit Agreement, we are not prohibited from paying cash dividends unless payment would trigger an event of default or if one currently exists. We do not anticipate paying any cash dividends in the foreseeable future.

Accounting for Uncertainty in Income Taxes

See Results of Operations, Provision for Income Taxes above for our discussion on accounting for uncertainty in income taxes.

Royalties

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

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Indemnifications

In the normal 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 directors and officers for certain events or occurrences while the director or officer is or was serving at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the director’s or officer’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We believe that there have been no material changes in our market risk exposures for the six months ended May 31, 2019, as compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended November 30, 2018.

ITEM 4. CONTROLS AND PROCEDURES

Based on their evaluation as of May 31, 2019, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting during the quarter ended May 31, 2019 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Adobe have been detected.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 13 for information regarding our legal proceedings.

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ITEM 1A. RISK FACTORS

As previously discussed, our actual results could differ materially from our forward-looking statements. Below we discuss some of the factors that could cause these differences. These and many other factors described in this report could adversely affect our operations, performance and financial condition.

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

The markets for our products and services are characterized by intense competition, new industry standards, evolving distribution models, limited barriers to entry, disruptive technology developments, short product life cycles, customer price sensitivity and frequent product introductions (including alternatives with limited functionality available at lower costs or free of charge). Any of these factors could create downward pressure on pricing and gross margins and could adversely affect our renewal and upsell and cross-sell rates, as well as our ability to attract new customers. Our future success will depend on our continued ability to enhance and integrate our existing products and services, introduce new products and services in a timely and cost-effective manner, meet changing customer expectations and needs, extend our core technology into new applications, and anticipate emerging standards, business models, software delivery methods and other technological developments. Furthermore, some of our competitors and potential competitors enjoy competitive advantages such as greater financial, technical, sales, marketing and other resources, broader brand awareness, and access to larger customer bases. As a result of these advantages, potential and current customers might select the products and services of our competitors, causing a loss of our market share. In addition, consolidation has occurred among some of our competitors. Further consolidations in these markets may subject us to increased competitive pressures and may harm our results of operations.

For additional information regarding our competition and the risks arising out of the competitive environment in which we operate, see the section entitled “Competition” contained in Part I. Item 1 of our annual filing.

If we cannot continue to develop, acquire, market and offer new products and services or enhancements to existing products and services that meet customer requirements, our operating results could suffer.

The process of developing and acquiring new technology products and services and enhancing existing offerings is complex, costly and uncertain. If we fail to anticipate customers’ rapidly changing needs and expectations or adapt to emerging technological trends, our market share and results of operations could suffer. We must make long-term investments, develop, acquire or obtain appropriate intellectual property and commit significant resources before knowing whether our predictions will accurately reflect customer demand for our products and services. If we misjudge customer needs in the future, our new products and services may not succeed and our revenues and earnings may be harmed. Additionally, any delay in the development, acquisition, marketing or launch of a new offering or enhancement to an existing offering could result in customer attrition or impede our ability to attract new customers, causing a decline in our revenue, earnings or stock price and weakening our competitive position.

We offer our products on a variety of hardware platforms. Consumers continue to migrate from personal computers to tablet and mobile devices. If we cannot continue adapting our products to tablet and mobile devices, or if our competitors can adapt their products more quickly than us, our business could be harmed. Releases of new devices or operating systems may make it more difficult for our products to perform or may require significant costs in order for us to adapt our solutions to such devices or operating systems. These potential costs and delays could harm our business.

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

The expectations and needs of technology consumers are constantly evolving. Our future success depends on a variety of factors, including our continued ability to innovate, introduce new products and services efficiently, enhance and integrate our products and services in a timely and cost-effective manner, extend our core technology into new applications, and anticipate emerging standards, business models, software delivery methods and other technological developments. Integration of our products and services with one another and other companies’ offerings creates an increasingly complex ecosystem that is partly reliant on third parties. If any disruptive technology, or competing products, services or operating systems that are not compatible with our solutions, achieve widespread acceptance, our operating results could suffer and our business could be harmed.

The introduction of certain technologies may reduce the effectiveness of our products. For example, some of our products rely on third-party cookies, which are placed on individual browsers when consumers visit websites that contain advertisements. We use these cookies to help our customers more effectively advertise, gauge the performance of their advertisements, and detect and prevent fraudulent activity. Consumers can block or delete cookies through their browsers or “ad-blocking” software or applications. The most common Internet browsers allow consumers to modify their browser settings to prevent cookies from being accepted by their browsers, or are set to block third-party cookies by default. Increased use of methods, software or applications that block cookies could harm our business.

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Security breaches in data centers we manage, or third parties manage on our behalf, may compromise the confidentiality, integrity, or availability of employee and customer data, which could expose us to liability and adversely affect our reputation and business.

We process and store significant amounts of employee and customer data, a large volume of which is hosted by third-party service providers. A security incident impacting our own data centers or those controlled by our service providers may compromise the confidentiality, integrity or availability of this data. Unauthorized access to or loss or disclosure of data stored by Adobe or our service providers may occur through physical break-ins, breaches of a secure network by an unauthorized party, software vulnerabilities or coding errors, employee theft or misuse or other misconduct. It is also possible that unauthorized access to or disclosure of employee or customer data may be obtained through inadequate use of security controls by customers or employees. Accounts created with weak or recycled passwords could allow cyber-attackers to gain access to customer data. Additionally, failure by customers to remove the accounts of their own employees, or the granting of accounts by the customer in an uncontrolled manner, may allow for access by former or unauthorized customer representatives. If there were an inadvertent disclosure of customer data, or if a third party were to gain unauthorized access to the data we possess on behalf of our customers, our operations could be disrupted, our reputation could be damaged and we could be subject to claims or other liabilities, regulatory investigations, or fines. In addition, such perceived or actual unauthorized loss or disclosure of the information we collect or breach of our security could damage our reputation, result in the loss of customers and harm our business.

We rely on data centers managed both by Adobe and third parties to host and deliver our services, as well as access, collect, process, use, transmit, and store data, and any interruptions or delays in these hosted services, or failures in data collection or transmission could expose us to liability and harm our business and reputation.

Much of our business relies on hardware and services that are hosted, managed, and controlled directly by Adobe or third-party service providers, including our online store at adobe.com, Creative Cloud, Document Cloud, and Experience Cloud solutions. We do not have redundancy for all of our systems, many of our critical applications reside in only one of our data centers, and our disaster recovery planning may not account for all eventualities. If our business relationship with a third-party provider of hosting or content delivery services is negatively affected, or if one of our content delivery suppliers were to terminate its agreement with us, without adequate notice, we might not be able to deliver the corresponding hosted offerings to our customers, which could subject us to reputational harm, costly and time intensive notification requirements, and cause us to lose customers and future business. Occasionally, we migrate data among data centers and to third-party hosted environments. If a transition among data centers or to third-party service providers encounters unexpected interruptions, unforeseen complexity, or unplanned disruptions despite precautions undertaken during the process, this may impair our delivery of products and services to customers and result in increased costs and liabilities, which may harm our operating results and our business.

It is also possible that hardware or software failures or errors in our systems (or those of our third-party service providers) could result in data loss or corruption, cause the information that we collect or maintain to be incomplete or contain inaccuracies that our customers regard as significant, or cause us to fail to meet committed service levels or comply with regulatory notification requirements. Furthermore, our ability to collect and report data may be delayed or interrupted by a number of factors, including access to the Internet, the failure of our network or software systems, security breaches or significant variability in visitor traffic on customer websites. In addition, computer viruses, worms, or other malware may harm our systems, causing us to lose data, and the transmission of computer viruses or other malware could expose us to litigation or regulatory investigation, and costly and time intensive notification requirements.

We may also find, on occasion, that we cannot deliver data and reports to our customers in near real time because of a number of factors, including significant spikes in customer activity on their websites or failures of our network or software, or the failure of our third-party service providers’ network or software. If we fail to plan infrastructure capacity appropriately and expand it proportionally with the needs of our customer base, and we experience a rapid and significant demand on the capacity of our data centers or those of third parties, service outages could occur, and our customers could suffer impaired performance of our services. Such a strain on our infrastructure capacity could subject us to regulatory and customer notification requirements, violations of service level agreement commitments, financial liabilities, result in customer dissatisfaction, or harm our business. If we supply inaccurate information or experience interruptions in our ability to capture, store and supply information in near real time or at all, our reputation could be harmed and we could lose customers as a result, or we could be found liable for damages or incur other losses.

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Increasing regulatory focus on privacy and security issues and expanding laws could impact our business models and expose us to increased liability.

As a global company, Adobe is subject to global data privacy and security laws, regulations, and codes of conduct that apply to our various business units. These laws and regulations may be inconsistent across jurisdictions and are subject to evolving and differing (sometimes conflicting) interpretations. Government officials and regulators, privacy advocates and class action attorneys are increasingly scrutinizing how companies collect, process, use, store, share and transmit personal data. This increased scrutiny may result in new interpretations of existing laws, thereby further impacting Adobe’s business. Globally, new and emerging laws, such as the General Data Protection Regulation (“GDPR”) and the Network and Information Systems Directive (“NISD”) in Europe, state laws in the U.S. on privacy, data and related technologies, such as the California Consumer Privacy Act, as well as industry self-regulatory codes create new compliance obligations and expand the scope of potential liability, either jointly or severally with our customers and suppliers. While we have invested in readiness to comply with applicable requirements, these new and emerging laws, regulations and codes may affect our ability (and our enterprise customers’ ability) to reach current and prospective customers, to respond to both enterprise and individual customer requests under the laws (such as individual rights of access, correction, and deletion of their personal information), and to implement our business models effectively. These new laws may also impact our innovation and business drivers in developing new and emerging technologies (e.g., artificial intelligence and machine learning). These requirements, among others, may impact demand for our offerings and force us to bear the burden of more onerous obligations in our contracts. Any perception of our practices, products or services as a violation of individual privacy rights may subject us to public criticism, class action lawsuits, reputational harm, or investigations or claims by regulators, industry groups or other third parties, all of which could disrupt our business and expose us to increased liability. Additionally, we collect and store information on behalf of our business customers and if our customers fail to comply with contractual obligations or applicable laws, it could result in litigation or reputational harm to us.

Transferring personal information across international borders is becoming increasingly complex. For example, European data transfers outside the European Economic Area are highly regulated. The mechanisms that we and many other companies rely upon for European data transfers (e.g. Privacy Shield and Model Clauses) are being contested in the European court system. We are closely monitoring developments related to requirements for transferring personal data outside the EU and other countries that have similar trans-border data flow requirements. These requirements may result in an increase in the obligations required to provide our services in the EU or in sanctions and fines for non-compliance. Several other countries, including Australia and Japan, have also established specific legal requirements for cross-border transfers of personal information. Other countries, such as India, are considering requirements for data localization (e.g. where personal data must remain in the country). If the mechanisms for transferring personal information from certain countries or areas, including Europe to the United States should be found invalid or if other countries implement more restrictive regulations for cross-border data transfers (or not permit data to leave the country of origin), such developments could harm our business, financial condition and results of operations.

Security vulnerabilities in our products and systems could lead to reduced revenue or to liability claims.

Maintaining the security of our products, computers and networks is a critical issue for us and our customers. Security researchers, criminal hackers and other third parties regularly develop new techniques to penetrate computer and network security measures and, as we have previously disclosed, certain parties have in the past managed to breach and misuse some of our systems and software in order to access our end users’ authentication and payment information. In addition, cyber-attackers also develop and deploy viruses, worms, credential stuffing attack tools, and other malicious software programs, some of which may be specifically designed to attack our products, systems, computers or networks. Sophisticated hardware and operating system applications that we develop or procure from third parties may contain defects in design or manufacture, including bugs, vulnerabilities and other problems that could unexpectedly compromise the security of the system or impair a customer’s ability to operate or use our products. The costs to prevent, eliminate, notify affected parties of, or alleviate cyber- or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities are significant, and our efforts to address these problems may not be successful or may be delayed and could result in interruptions, delays, cessation of service and loss of existing or potential customers. It is impossible to predict the extent, frequency or impact these problems may have on us.

Outside parties have in the past and may in the future attempt to fraudulently induce our employees or users of our products or services to disclose sensitive information via illegal electronic spamming, phishing or other tactics. Unauthorized parties may also attempt to gain physical access to our facilities in order to infiltrate our information systems or attempt to gain logical access to our products, services, or information systems for the purpose of exfiltrating content and data. These actual and potential breaches of our security measures and the accidental loss, inadvertent disclosure or unauthorized dissemination of proprietary information or sensitive, personal or confidential data about us, our employees, our customers or their end users, including the potential loss or disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our employees, our customers or the individuals affected to a risk of loss or misuse of this information. This may result in litigation and liability or fines, our compliance with costly and time intensive notice requirements, governmental inquiry or oversight or a loss of customer confidence, any of which could harm our business or damage our brand and reputation, possibly impeding our

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present and future success in retaining and attracting new customers and thereby requiring time and resources to repair our brand and reputation. These risks will likely increase as we expand our hosted offerings, integrate our products and services, and store and process more data, including personal information.

These problems affect our products and services in particular because cyber-attackers tend to focus their efforts on popular offerings with a large user base, and we expect them to continue to do so. Critical vulnerabilities may be identified in some of our applications and services and those of our third-party service providers. These vulnerabilities could cause such applications and services to crash and could allow an attacker to take control of the affected system, which could result in liability to us or limit our ability to conduct our business and deliver our products and services to customers. We devote significant resources to address security vulnerabilities through engineering more secure products, enhancing security and reliability features in our products and systems, code hardening, conducting rigorous penetration tests, deploying updates to address security vulnerabilities, reviewing our service providers’ security controls, and improving our incident response time, but these security vulnerabilities cannot be totally eliminated. The cost of these steps could reduce our operating margins, and we may be unable to implement these measures quickly enough to prevent cyber-attackers from gaining unauthorized access into our systems and products. Despite our preventative efforts, actual or perceived security vulnerabilities in our products and systems may harm our reputation or lead to claims against us (and have in the past led to such claims), and could lead some customers to stop using certain products or services, to reduce or delay future purchases of products or services, or to use competing products or services. If we do not make the appropriate level of investment in our technology systems or if our systems become out-of-date or obsolete and we are not able to deliver the quality of data security customers require, our business could be adversely affected. Customers may also adopt security measures designed to protect their existing computer systems from attack, which could delay adoption of new technologies. Further, if we or our customers are subject to a future attack, or our technology is used in a third-party attack, we could be subject to costly and time intensive notice requirements, and it may be necessary for us to take additional extraordinary measures and make additional expenditures to take appropriate responsive and preventative steps. Any of these events could adversely affect our revenue or margins. Moreover, delayed sales, lower margins or lost customers resulting from disruptions caused by cyber-attacks or preventative measures could adversely affect our financial results, stock price and reputation.

Some of our enterprise offerings have extended and complex sales cycles, which can make our sales cycles unpredictable.

Sales cycles for some of our enterprise offerings, including our Adobe Experience Cloud solutions and ETLAs in our Digital Media business, are multi-phased and complex. The complexity in these sales cycles is due to several factors, including:


•	the need for our sales representatives to educate customers about the use and benefit of large-scale deployments of our products and services, including technical capabilities, security features, potential cost savings and return on investment;


•	the desire of organizations to undertake significant evaluation processes to determine their technology requirements prior to making information technology expenditures;


•	the need for our representatives to spend a significant amount of time assisting potential customers in their testing and evaluation of our products and services;


•	intensifying competition within the industry;


•	the negotiation of large, complex, enterprise-wide contracts;


•	the need for our customers to obtain requisition approvals from various decision makers within their organizations due to the complexity of our solutions touching multiple departments within customers’ organizations; and


•	customer budget constraints, economic conditions and unplanned administrative delays.

We spend substantial time and expense on our sales efforts without assurance that potential customers will ultimately purchase our solutions. As we target our sales efforts at larger enterprise customers, these trends are expected to continue and could have a greater impact on our results of operations. Additionally, our enterprise sales pattern has historically been uneven, where a higher percentage of a quarter’s total sales occur during the final weeks of each quarter, which is common in our industry. Our extended sales cycle for these products and services makes it difficult to predict when a given sales cycle will close.

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

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

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results of operations until future periods. Our subscription model could also make it difficult for us to rapidly increase our revenue from subscription-based or hosted services through additional sales in any period, as revenue from new customers will be recognized over the applicable subscription term.

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

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

Our Adobe Experience Cloud, Creative Cloud, and Document Cloud offerings typically involve subscription-based offerings pursuant to product and service agreements. Revenue from our subscription customers is generally recognized ratably over the term of their agreements, which typically range from 1 to 36 months. Our customers have no obligation to renew their subscriptions for our services after the expiration of their initial subscription period, and customers may not renew their subscriptions at the same or higher level of service, for the same number of seats or for the same duration of time, if at all. Moreover, under certain circumstances, some of our customers have the right to cancel their agreements prior to the expiration of the terms. Our varied customer base combined with the flexibility we offer in the length of our subscription-based agreements complicates our ability to precisely forecast renewal rates. Therefore, we cannot provide assurance that we will be able to accurately predict future customer renewal rates.

Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with our services, our ability to continue enhancing features and functionality, the reliability (including uptime) of our subscription offerings, the prices of offerings and those offered by our competitors, the actual or perceived information security of our systems and services, decreases in the size of our customer base, reductions in our customers’ spending levels or declines in customer activity as a result of economic downturns or uncertainty in financial markets. If our customers do not renew their subscriptions or if they renew on terms less favorable to us, our revenue may decline.

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

We may not realize the anticipated benefits of an investment or acquisition of a company, division, product or technology, each of which involves numerous risks. These risks include:


•	inability to achieve the financial and strategic goals for the acquired and combined businesses;


•	difficulty in, and the cost of, effectively integrating the operations, technologies, products or services, and personnel of the acquired business;


•	entry into markets in which we have minimal prior experience and where competitors in such markets have stronger market positions;


•	disruption of our ongoing business and distraction of our management and other employees from other opportunities and challenges;


•	inability to retain personnel of the acquired business;


•	inability to retain key customers, distributors, vendors and other business partners of the acquired business;


•	inability to take advantage of anticipated tax benefits;


•	incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;


•	elevated delinquency or bad debt write-offs related to receivables of the acquired business we assume;


•	increased accounts receivables collection times and working capital requirements associated with acquired business models;


•	additional costs of bringing acquired companies into compliance with laws and regulations applicable to a multinational corporation;

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•	difficulty in maintaining controls, procedures and policies during the transition and integration;


•	impairment of our relationships with employees, customers, partners, distributors or third-party providers of our technologies, products or services;


•	failure of our due diligence processes to identify significant problems, liabilities or other challenges of an acquired company or technology;


•	exposure to litigation or other claims in connection with, or inheritance of claims or litigation risk as a result of, an acquisition, such as claims from terminated employees, customers, former stockholders or other third parties;


•	incurring significant exit charges if products or services acquired in business combinations are unsuccessful;


•	inability to conclude that our internal controls over financial reporting are effective;


•	inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions;


•	the failure of strategic investments to perform as expected or to meet financial projections;


•	delay in customer and distributor purchasing decisions due to uncertainty about the direction of our product and service offerings; and


•	incompatibility of business cultures.

Mergers and acquisitions of technology companies are inherently risky. If we do not complete an announced acquisition transaction or integrate an acquired business successfully and in a timely manner, we may not realize the benefits of the acquisition to the extent anticipated, and in certain circumstances an acquisition could harm our financial position.

Our business could be harmed if we fail to effectively manage critical strategic third-party business relationships.

As our offerings expand and our customer base grows, our relationships with strategic partners become increasingly valuable. If our contractual relationships with these third parties were to terminate, or if we were unable to renew on favorable terms, our business could be harmed. This is especially the case when the third party’s offerings are integrated with our products and services, or where the third party’s offerings are difficult to substitute or replace. Alternative arrangements for such products and services may not be available to us, or on commercially reasonable terms, and we may experience business interruptions upon a transition to an alternative partner. The failure of third parties to provide acceptable products and services or to update their technology may result in a disruption to our business operations and those of our customers, which may reduce our revenues and profits, cause us to lose customers and damage our reputation.

We face various risks associated with our operating as a multinational corporation.

As a global business that generates approximately 42% of our total revenue from sales to customers outside of the Americas, we are subject to a number of risks, including:


•	foreign currency fluctuations and controls;


•	international and regional economic, political and labor conditions, including any instability or security concerns abroad;


•	tax laws (including U.S. taxes on foreign subsidiaries);


•	increased financial accounting and reporting burdens and complexities;


•	changes in, or impositions of, legislative or regulatory requirements;


•	changes in laws governing the free flow of data across international borders;


•	failure of laws to protect our intellectual property rights adequately;


•	inadequate local infrastructure and difficulties in managing and staffing international operations;


•	delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers;

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•	the imposition of governmental economic sanctions on countries in which we do business or where we plan to expand our business;


•	costs and delays associated with developing products in multiple languages;


•	operating in locations with a higher incidence of corruption and fraudulent business practices; and


•	other factors beyond our control, such as terrorism, war, natural disasters and pandemics.

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

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

We are a global company subject to varied and complex laws, regulations and customs, both domestically and internationally. These laws and regulations relate to a number of aspects of our business, including trade protection, import and export control, data and transaction processing security, payment card industry data security standards, records management, user-generated content hosted on websites we operate, privacy practices, data residency, corporate governance, anti-trust and competition, employee and third-party complaints, anti-corruption, gift policies, conflicts of interest, securities regulations and other regulatory requirements affecting trade and investment. The application of these laws and regulations to our business is often unclear and may at times conflict. For example, in many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by U.S. regulations applicable to us, including the Foreign Corrupt Practices Act. We cannot provide assurance that our employees, contractors, agents, and business partners will not take actions in violation of our internal policies or U.S. laws. Compliance with these laws and regulations may involve significant costs or require changes in our business practices that result in reduced revenue and profitability. Non-compliance could also result in fines, damages, criminal sanctions against us, our officers or our employees, prohibitions on the conduct of our business, and damage to our reputation.

In addition, approximately 48% of our employees are located outside the United States. Accordingly, we are exposed to changes in laws governing our employee relationships in various U.S. and foreign jurisdictions, including laws and regulations regarding wage and hour requirements, fair labor standards, employee data privacy, unemployment tax rates, workers’ compensation rates, citizenship requirements and payroll and other taxes, which likely would have a direct impact on our operating costs.

Changes in accounting principles, or interpretations thereof, could have a significant impact on our financial position and results of operations.

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles, how the principles are interpreted, or the adoption of new accounting standards can have a significant effect on our reported results, and could even retroactively affect previously reported transactions, and may require that we make significant changes to our systems, processes and controls.

Changes resulting from these new standards may result in materially different financial results and may require that we change how we process, analyze and report financial information and that we change financial reporting controls. For additional information regarding these new standards, see the section titled “Recent Accounting Pronouncements Not Yet Effective” within Part II. Item 8, Note 1. Basis of Presentation and Summary of Significant Accounting Policies.

Such changes in accounting principles may have an adverse effect on our business, financial position, and income, or cause an adverse deviation from our revenue and profitability targets, which may negatively impact our financial results.

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

We are a United States-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. A significant portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries. The Tax Cuts and Jobs Act, enacted into law on December 22, 2017, changed existing U.S. tax law applicable to us and included certain international provisions effective for us in fiscal 2019. The applicability and impact of these new tax provisions is dependent in part on changes we may make to our trading structure. The net impact of such potential change(s) is uncertain and could adversely affect our tax rate and cash flow in future years.

Our income tax expense has differed from the tax computed at the U.S. federal statutory income tax rate due primarily to discrete items and to tax on earnings from foreign operations. Unanticipated changes in our tax rates could affect our future results

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of operations. Our future effective tax rates could be unfavorably affected by changes in the tax rates in jurisdictions where our income is earned, by changes in our repatriation policy, by changes in or our interpretation of tax rules and regulations in the jurisdictions in which we do business, by unanticipated decreases in the amount of earnings in countries with low statutory tax rates, by unexpected negative changes in business and market conditions that could reduce certain tax benefits, or by changes in the valuation of our deferred tax assets and liabilities.

Uncertainty about current and future economic conditions and other adverse changes in general political conditions in any of the major countries in which we do business could adversely affect our operating results.

As our business has grown, we have become increasingly subject to the risks arising from adverse changes in economic and political conditions, both domestically and globally. Uncertainty about the effects of current and future economic and political conditions on us, our customers, suppliers and partners makes it difficult for us to forecast operating results and to make decisions about future investments. If economic growth in countries where we do business slows, customers may delay or reduce technology purchases, advertising spending or marketing spending. This could result in reductions in sales of our products and services, more extended sales cycles, slower adoption of new technologies and increased price competition. Among our customers are government entities, including the U.S. federal government, and our revenue could decline if spending cuts impact the government’s ability to purchase our products and services. Deterioration in economic conditions in any of the countries in which we do business could also cause slower or impaired collections on accounts receivable, which may adversely impact our liquidity and financial condition.

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

Political instability or adverse political developments in or around any of the major countries in which we do business would also likely harm our business, results of operations and financial condition.

The success of some of our product and service offerings depends on our ability to continue to attract and retain customers of and contributors to our online marketplaces for creative content.

The success of some of our product and service offerings, such as Adobe Stock, depends on our ability to continue to attract new customers and contributors to these online marketplaces for creative content, as well as our ability to continue to retain existing customers and contributors. An increase in paying customers has generally resulted in more content from contributors, which increases the size of our collection and in turn attracts new paying customers. We rely on the functionality and features of our online marketplaces, the size and content of our collection and the effectiveness of our marketing efforts to attract new customers and contributors and retain existing ones. New technologies may render the features of our online marketplaces obsolete, our collection may fail to grow as anticipated or our marketing efforts may be unsuccessful, any of which may adversely affect our results of operations.

Our intellectual property portfolio is a valuable asset and we may not be able to protect our intellectual property rights, including our source code, from infringement or unauthorized copying, use or disclosure.

Our intellectual property portfolio is a valuable asset. Infringement or misappropriation of our patents, trademarks, trade secrets, copyrights and other intellectual property rights could result in lost revenues and ultimately reduce their value. Preventing unauthorized use or infringement of our intellectual property rights is inherently difficult. We actively combat software piracy as we enforce our intellectual property rights, but we nonetheless lose significant revenue due to illegal use of our software. If piracy

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activities continue at historical levels or increase, they may further harm our business. We apply for patents in the U.S. and internationally to protect our newly created technology and if we are unable to obtain patent protection for the technology described in our pending patent, or if the patent is not obtained timely, this could result in revenue loss, adverse effects on operations, and harm to our business. We offer our products and services in foreign countries and we may seek intellectual property protection from those foreign legal systems. Some of those foreign countries may not have as robust or comprehensive of intellectual property protection laws and schemes as those offered in the U.S. In some foreign countries, the mechanisms to enforce intellectual property rights may be inadequate to protect our technology, which could harm our business.

If unauthorized disclosure of our source code occurs through security breach, cyber-attack or otherwise, we could lose future trade secret protection for that source code. The loss of future trade secret protection could make it easier for third parties to compete with our products by copying functionality, which could cause us to lose customers and could adversely affect our revenue and operating margins. We also seek to protect our confidential information and trade secrets through the use of non-disclosure agreements with our customers, contractors, vendors and partners. However, there is a risk that our confidential information and trade secrets may be disclosed or published without our authorization, and in these situations, enforcing our rights may be difficult or costly.

We may incur substantial costs defending against third parties alleging that we infringe their proprietary rights.

We have been, are currently, and may in the future be, subject to claims, negotiations and complex, protracted litigation relating to disputes regarding the validity or alleged infringement of third-party intellectual property rights, including patent rights. Intellectual property disputes and litigation are typically costly and can be disruptive to our business operations by diverting the attention of management and key personnel. We may not prevail in every lawsuit or dispute. Third-party intellectual property disputes, including those initiated by patent assertion entities, could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from licensing certain of our products or offering certain of our services, subject us to injunctions restricting our sale of products or services, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers, including contractual provisions under various license arrangements and service agreements. In addition, we may incur significant costs in acquiring the necessary third-party intellectual property rights for use in our products, in some cases to fulfill contractual obligations with our customers. Any of these occurrences could significantly harm our business.

We may incur losses associated with currency fluctuations and may not be able to effectively hedge our exposure.

Our operating results are subject to fluctuations in foreign currency exchange rates due to the global scope of our business. Global economic events, including trade disputes, economic sanctions and emerging market volatility, and associated uncertainty may cause currencies to fluctuate. We attempt to mitigate a portion of these risks through foreign currency hedging based on our judgment of the appropriate trade-offs among risk, opportunity and expense. We regularly review our program to partially hedge our exposure to foreign currency fluctuations and make adjustments as necessary. Our hedging activities may not offset more than a portion of the adverse financial impact resulting from unfavorable movement in foreign currency exchange rates, which could adversely affect our financial condition or results of operations.

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

Our customers rely on our customer service support organization to resolve issues with our products and services. We outsource a substantial portion of our customer service and technical support activities to third-party service providers. We depend heavily on these third-party customer service and technical support representatives working on our behalf, and we expect to continue to rely heavily on third parties in the future. This strategy presents risks to our business due to the fact that we may not be able to influence the quality of support as directly as we would be able to do if our own employees performed these activities. Our customers may react negatively to providing information to, and receiving support from, third-party organizations, especially if these third-party organizations are based overseas. If we encounter problems with our third-party customer service and technical support providers, our reputation may be harmed, our ability to sell our offerings could be adversely affected, and we could lose customers and associated revenue.

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

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


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

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•	changes in estimates or recommendations by securities analysts;


•	whether our results meet analysts’ expectations;


•	compression or expansion of multiples used by investors and analysts to value high technology SaaS companies;


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


•	the loss of large customers or our inability to increase sales to existing customers, retain customers or attract new customers;


•	recruitment or departure of key personnel;


•	variations in our or our competitors’ results of operations, changes in the competitive landscape generally and developments in our industry;


•	general socio-economic, political or market conditions; and


•	unusual events such as significant acquisitions by us or our competitors, divestitures, litigation, regulatory actions and other factors, including factors unrelated to our operating performance.

In addition, the market for technology stocks or the stock market in general may experience uneven investor confidence, which may cause the market price for our common stock to decline for reasons unrelated to our operating performance. Volatility in the market price of a company’s securities for a period of time may increase the company’s susceptibility to securities class action litigation. Oftentimes, this type of litigation is expensive and diverts management’s attention and resources which may adversely affect our business.

Contracting with government entities exposes us to additional risks inherent in the government procurement process.

We provide products and services, directly and indirectly, to a variety of government entities, both domestically and internationally. Risks associated with licensing and selling products and services to government entities include more extended sales and collection cycles, varying governmental budgeting processes and adherence to complex procurement regulations and other government-specific contractual requirements. We may be subject to audits and investigations relating to our government contracts and any violations could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, payment of fines, and suspension or debarment from future government business, as well as harm to our reputation and financial results.

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

Much of our future success depends on the continued service, availability and performance of our senior management. These individuals have acquired specialized knowledge and skills with respect to Adobe. The loss of any of these individuals could harm our business, especially if we have not been successful in developing adequate succession plans. Our business is also dependent on our ability to retain, hire and motivate talented, highly skilled personnel across all levels of our organization. Experienced personnel in the information technology industry are in high demand and competition for their talents is intense in many areas where our employees are located. We may experience higher compensation costs to retain senior management and experienced personnel that may not be offset by improved productivity or increased sales. If we are unable to continue to successfully attract and retain key personnel, our business may be harmed.

We continue to hire personnel in countries where exceptional technical knowledge and other expertise are offered at lower costs, which increases the efficiency of our global workforce structure and reduces our personnel related expenditures. Nonetheless, as globalization continues, competition for these employees in these countries has increased, which may impact our ability to retain these employees and increase our expenses resulting from competitive compensation. We may continue to expand our international operations and international sales and marketing activities, which would require significant management attention and resources. We may be unable to scale our infrastructure effectively or as quickly as our competitors in these markets, and our revenue may not increase to offset these expected increases in costs and operating expenses, causing our results to suffer.

We believe that a critical contributor to our success to date has been our corporate culture, which we have built to foster innovation, teamwork and employee satisfaction. As we grow, including from the integration of employees and businesses acquired in connection with previous or future acquisitions, we may find it difficult to maintain important aspects of our corporate culture, which could negatively affect our ability to retain and recruit personnel who are essential to our future success.

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Failure to manage our sales and distribution channels effectively could result in a loss of revenue and harm to our business.

We contract with a number of software distributors and other strategic partners, none of which is individually responsible for a material amount of our total net revenue for any recent period. Nonetheless, if any single agreement with one of our distributors were terminated, any prolonged delay in securing a replacement distributor could have a negative impact on our results of operations.

Successfully managing our indirect distribution channel efforts to reach various customer segments for our products and services is a complex process across the broad range of geographies where we do business or plan to do business. Our distributors and other channel partners are independent businesses that we do not control. Notwithstanding the independence of our channel partners, we face legal risk and potential reputational harm from the activities of these third parties including, but not limited to, export control violations, workplace conditions, corruption and anti-competitive behavior.

We cannot be certain that our distribution channel will continue to market or sell our products and services effectively. If our distribution channel is not successful, we may lose sales opportunities, customers and revenue. Our distributors also sell our competitors’ products and services, and if they favor our competitors’ products or services for any reason, they may fail to market our products or services effectively or to devote resources necessary to provide effective sales, which would cause our results to suffer. We also distribute some products and services through our OEM channel, and if our OEMs decide not to bundle our applications on their devices, our results could suffer. In addition, the financial health of our distributors and our continuing relationships with them are important to our success. Some of these distributors may be unable to withstand adverse changes in economic conditions, which could result in insolvency, the inability of such distributors to obtain credit to finance purchases of our products and services, or a delay in paying their obligations to us.

We also sell some of our products and services through our direct sales force. Risks associated with this sales channel include more extended sales and collection cycles associated with direct sales efforts, challenges related to hiring, retaining and motivating our direct sales force, and substantial amounts of ongoing training for sales representatives. Moreover, recent hires may not become as productive as we would like, as in most cases it takes a significant period of time before they achieve full productivity. Our business could be seriously harmed if our expansion efforts do not generate a corresponding significant increase in revenue and we are unable to achieve the efficiencies we anticipate. In addition, the loss of key sales employees could impact our customer relationships and future ability to sell to certain accounts covered by such employees.

If our goodwill or amortizable intangible assets become impaired, then we could be required to record a significant charge to earnings.

GAAP requires us to test for goodwill impairment at least annually. In addition, we review our goodwill and amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include declines in stock price, market capitalization or cash flows, and slower growth rates in our industry. Depending on the results of our review, we could be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets were determined, negatively impacting our results of operations.

We have issued $1.9 billion of notes in debt offerings and have a $2.25 billion term loan, and may incur other debt in the future, which may adversely affect our financial condition and future financial results.

We have $1.9 billion in senior unsecured notes and a $2.25 billion senior unsecured term loan outstanding. We also have a $1 billion senior unsecured revolving credit agreement, which is currently undrawn. This debt may adversely affect our financial condition and future financial results by, among other things:


•	increasing our vulnerability to adverse changes in general economic and industry conditions;


•	requiring the dedication of a portion of our expected cash flow from operations to service our indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and acquisitions; and


•	limiting our flexibility in planning for, or reacting to, changes in our business and our industry.

Our senior unsecured notes and senior unsecured credit agreements impose restrictions on us and require us to maintain compliance with specified covenants. Our ability to comply with these covenants may be affected by events beyond our control. If we breach any of the covenants and do not obtain a waiver from the noteholders or lenders, then, subject to applicable cure periods, any outstanding indebtedness may be declared immediately due and payable.

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In addition, changes by any rating agency to our credit rating may negatively impact the value and liquidity of both our debt and equity securities, as well as the potential costs associated with a refinancing of our debt. Under certain circumstances, if our credit ratings are downgraded or other negative action is taken, the interest rate payable by us under our revolving credit facility and Term Loan could increase. Downgrades in our credit ratings could also affect the terms of any such financing and restrict our ability to obtain additional financing in the future.

Catastrophic events may disrupt our business.

We are a highly automated business and rely on our network infrastructure and enterprise applications, internal technology systems and website for our development, marketing, operations, support, hosted services and sales activities. In addition, some of our businesses rely on third-party hosted services, and we do not control the operation of third-party data center facilities serving our customers from around the world, which increases our vulnerability. A disruption, infiltration or failure of these systems or third-party hosted services in the event of a major earthquake, fire, flood, tsunami or other weather event, power loss, telecommunications failure, software or hardware malfunctions, pandemics, cyber-attack, war, terrorist attack or other catastrophic event that our disaster recovery plans do not adequately address, could cause system interruptions, reputational harm, loss of intellectual property, delays in our product development, lengthy interruptions in our services, breaches of data security and loss of critical data. Any of these events could prevent us from fulfilling our customers’ orders or could negatively impact a country or region in which we sell our products, which could in turn decrease that country’s or region’s demand for our products. Our corporate headquarters, a significant portion of our research and development activities, certain of our data centers and certain other critical business operations are located in the San Francisco Bay Area, and additional facilities where we conduct significant operations are located in the Salt Lake Valley Area, both of which are near major earthquake faults. A catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected.

Climate change may have a long-term impact on our business.

While we seek to partner with organizations that mitigate their business risks associated with climate change, we recognize that there are inherent risks wherever business is conducted. Access to clean water and reliable energy in the communities where we conduct our business, whether for our offices or for our vendors, is a priority. Our major sites in California, Utah and India are vulnerable to prolonged droughts due to climate change. In the event of a natural disaster that disrupts business due to limited access to these resources, we have the potential to experience losses to our business, and added costs to resume operations. To accurately assess and take potential proactive action as appropriate, Adobe is aligned with the guidelines of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures recommendations and the Sustainability Accounting Standards Board environmental metrics.

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

Our cash equivalent and short-term investment portfolio as of May 31, 2019 consisted of asset-backed securities, corporate debt securities, foreign government securities, money market mutual funds, municipal securities, time deposits and U.S. agency securities. We follow an established investment policy and set of guidelines to monitor and help mitigate our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes.

Should financial market conditions worsen in the future, investments in some financial instruments may pose risks arising from market liquidity and credit concerns. In addition, any deterioration of the capital markets could cause our other income and expense to vary from expectations. As of May 31, 2019, we had no material impairment charges associated with our short-term investment portfolio, and although we believe our current investment portfolio has little risk of material impairment, we cannot predict future market conditions, market liquidity or credit availability, and can provide no assurance that our investment portfolio will remain materially unimpaired.

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

Below is a summary of stock repurchases for the three months ended May 31, 2019. See Note 11 of our notes to condensed consolidated financial statements for information regarding our stock repurchase program.



Period	Shares Repurchased	Average Price Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Approximate Dollar Value that May Yet be Purchased Under the Plans
	(in thousands, except average price per share)
Beginning repurchase authority⁽¹⁾					$	7,509,146
March 2, 2019—March 29, 2019
Shares repurchased	612	$	260.10	612	$	(159,146	)
March 30, 2019—April 26, 2019
Shares repurchased	940	$	265.79	940	$	(250,000	)	⁽²⁾
April 27, 2019—May 31, 2019
Shares repurchased	903	$	277.19	903	$	(250,263	)	⁽²⁾
Total	2,455			2,455	$	6,849,737

^{_________________________________________}


⁽¹⁾	In May 2018, the Board of Directors granted authority to repurchase up to $8 billion in common stock through the end of fiscal 2021.


⁽²⁾	In March 2019, we entered into a structured stock repurchase agreement with a large financial institution whereupon we provided them with a prepayment of $750 million. As of May 31, 2019, approximately $249.7 million of the prepayment remained under this agreement.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

INDEX TO EXHIBITS

Incorporated by Reference**

Exhibit

Number

Exhibit Description

Form

Filing Date

Exhibit Number

SEC File No.

Filed

Herewith

3.1

Restated Certificate of Incorporation of Adobe

8-K

4/26/11

3.3

000-15175

3.2

Certificate of Amendment to Restated Certificate of Adobe

8-K

10/9/18

3.1

000-15175

3.3

Amended and Restated Bylaws

8-K

10/9/18

3.2

000-15175

4.1

Specimen Common Stock Certificate

10-K

1/25/19

4.1

000-15175

4.2

Form of Indenture dated as of January 25, 2010 by and between Adobe and Wells Fargo Bank, National Association, as trustee

S-3

2/26/16

4.1

333-209764

4.3

Form of Global Note for Adobe Systems Incorporated’s 4.750% Notes due 2020, together with Form of Officer’s Certificate setting forth the terms of the Note

8-K

1/26/10

4.1

000-15175

4.4

Form of Global Note for Adobe’s 3.250% Notes due 2025, together with Form of Officer’s Certificate setting forth the terms of the Note

8-K

1/26/15

4.1

000-15175

10.1A

Amended 1994 Performance and Restricted Stock Plan*

10-Q

4/9/10

10.1

000-15175

10.1B

Form of Restricted Stock Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan*

10-K

1/23/09

10.3

000-15175

10.1C

Form of Restricted Stock Unit Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan*

10-K

1/26/12

10.13

000-15175

10.2

1997 Employee Stock Purchase Plan, as amended*

10-Q

6/29/16

10.3

000-15175

10.3A

2003 Equity Incentive Plan, as amended*

8-K

4/13/18

10.2

000-15175

10.3B

Form of Stock Option Agreement used in connection with the 2003 Equity Incentive Plan*

8-K

12/20/10

99.4

000-15175

10.3C

Form of Restricted Stock Agreement used in connection with the 2003 Equity Incentive Plan*

10-Q

10/7/04

10.11

000-15175

10.3D

Form of RSU Grant Notice and Award Agreement pursuant to 2003 Equity Incentive Plan*

8-K

1/26/18

10.6

000-15175

10.3E

Form of Restricted Stock Unit Grant Notice and Award Agreement pursuant to 2003 Equity Incentive Plan*

8-K

1/28/19

10.5

000-15175

10.3F

2016 Performance Share Program pursuant to the 2003 Equity Incentive Plan*

8-K

1/29/16

10.2

000-15175

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Incorporated by Reference**

Exhibit

Number

Exhibit Description

Form

Filing Date

Exhibit Number

SEC File No.

Filed

Herewith

10.3G

Form of 2016 Performance Share Award Grant Notice and Award Agreement pursuant to the 2003 Equity Incentive Plan (applicable to the 2016 Performance Share Program)*

8-K

1/29/16

10.3

000-15175

10.3H

2017 Performance Share Program pursuant to the 2003 Equity Incentive Plan*

8-K

1/27/17

10.2

000-15175

10.3I

Form of 2017 Performance Share Award Grant Notice and Award Agreement pursuant to 2017 Performance Share Program and 2003 Equity Incentive Plan*

8-K

1/27/17

10.3

000-15175

10.3J

2018 Performance Share Program pursuant to the 2003 Equity Incentive Plan*

8-K

1/26/18

10.2

000-15175

10.3K

Form of 2018 Performance Share Award Grant Notice and Award Agreement pursuant to 2018 Performance Share Program and 2003 Equity Incentive Plan*

8-K

1/26/18

10.3

000-15175

10.3L

2019 Performance Share Program pursuant to the 2003 Equity Incentive Plan*

8-K

1/28/19

10.2

000-15175

10.3M

Form of 2019 Performance Share Award Grant Notice and Award Agreement pursuant to 2019 Performance Share Program and 2003 Equity Incentive Plan*

8-K

1/28/19

10.3

000-15175

10.3N

Form of Director Initial Grant Restricted Stock Unit Award Agreement used in connection with the 2003 Equity Incentive Plan*

8-K

12/20/10

99.6

000-15175

10.3O

Form of Director Annual Grant Restricted Stock Unit Award Agreement used in connection with the 2003 Equity Incentive Plan*

8-K

12/20/10

99.7

000-15175

10.3P

Form of Director Annual Grant Stock Option Agreement used in connection with the 2003 Equity Incentive Plan*

8-K

12/20/10

99.8

000-15175

10.4

Retention Agreement between Adobe and Shantanu Narayen, effective December 5, 2014*

8-K

12/11/14

10.2

000-15175

10.5

Form of Indemnity Agreement*

10-Q

6/26/09

10.12

000-15175

10.6

Adobe Deferred Compensation Plan, as Amended and Restated*

10-K

1/20/15

10.19

000-15175

10.7

Credit Agreement, dated as of October 17, 2018, among Adobe Inc. and certain subsidiaries as Borrowers, JPMorgan Chase Bank, N.A., Wells Fargo Bank National Association, U.S Bank National Association, Societe Generale S.A. as Co-Syndication Agents, Bank of America, N.A. as Administrative Agent and Swing Line Lender, and the Other Lenders Party Thereto

8-K

10/19/18

10.1

000-15175

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		Incorporated by Reference**
Exhibit Number	Exhibit Description	Form	Filing Date	Exhibit Number	SEC File No.	Filed Herewith

10.8	Credit Agreement, dated as of October 17, 2018, among Adobe Inc. as Borrower, JPMorgan Chase Bank, N.A. as Syndication Agent, Wells Fargo Bank National Association as Documentation Agent, Bank of America, N.A. as Administrative Agent, and the Other Lenders Party Thereto	8-K	10/19/18	10.2	000-15175

10.9	Omniture, Inc. 2006 Equity Incentive Plan and related forms*	10-Q	8/6/09	10.3	000-52076

10.10	Omniture, Inc. 2008 Equity Incentive Plan and related forms*	10-K	2/27/09	10.10	000-52076

10.11	Demdex, Inc. 2008 Stock Plan, as amended*	S-8	1/27/11	99.1	333-171902

10.12	EchoSign, Inc. 2005 Stock Plan, as amended*	S-8	7/29/11	99.1	333-175910

10.13	TypeKit, Inc. 2009 Equity Incentive Plan, as amended*	S-8	10/7/11	99.1	333-177229

10.14	Auditude, Inc. 2009 Equity Incentive Plan, as amended*	S-8	11/18/11	99.1	333-178065

10.15	Efficient Frontier, Inc. 2003 Stock Option/Stock Issuance Plan, as Amended and Restated*	S-8	1/27/12	99.1	333-179221

10.16A	Behance, Inc. 2012 Equity Incentive Plan*	S-8	1/23/13	99.1	333-186143

10.16B	Amendment No. 1 to the Behance, Inc. 2012 Equity Incentive Plan*	S-8	1/23/13	99.2	333-186143

10.17	Neolane 2008 Stock Option Plan*	S-8	8/27/13	99.1	333-190846

10.18	2012 Neolane Stock Option Plan for The United States*	S-8	8/27/13	99.2	333-190846

10.19A	Aviary, Inc. 2008 Stock Plan, as amended*	S-8	9/26/14	99.1	333-198973

10.19B	Form of Stock Option Grant Notice and Award Agreement pursuant to the Aviary, Inc. 2008 Stock Plan (Installment Vesting)*	S-8	9/26/14	99.2	333-198973

10.19C	Form of Stock Option Grant Notice and Award Agreement pursuant to the Aviary, Inc. 2008 Stock Plan (Installment Vesting, Non- U.S.)*	S-8	9/26/14	99.3	333-198973

10.20	Picasso Acquisition Holding 1, Inc. 2012 Stock Option and Grant Plan*	S-8	3/13/15	99.1	333-202732

10.21	TubeMogul, Inc. 2007 Equity Compensation Plan, as amended, and forms of agreement thereunder††*	S-1	3/26/14	10.2	333-194817

10.22	TubeMogul, Inc. 2014 Equity Incentive Plan, and forms of agreement thereunder††*	S-1A	7/7/14	10.3	333-194817

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		Incorporated by Reference**
Exhibit Number	Exhibit Description	Form	Filing Date	Exhibit Number	SEC File No.	Filed Herewith

10.23	MagentoTech LLC Unit Option Plan, as amended*	S-8	6/27/18	99.14	333-225922

10.24	Adobe Systems Incorporated 2017 Executive Severance Plan in the Event of a Change of Control*	8-K	12/14/17	10.1	000-15175

10.25	2016 Executive Annual Incentive Plan*	8-K	1/29/16	10.5	000-15175

10.26	2016 Executive Cash Performance Bonus Plan*	8-K	1/29/16	10.4	000-15175

10.27	2017 Executive Annual Incentive Plan*	8-K	1/27/17	10.5	000-15175

10.28	2018 Executive Annual Incentive Plan*	8-K	1/26/18	10.5	000-15175

10.29	2019 Executive Annual Incentive Plan*	8-K	1/28/19	10.4	000-15175

10.30	Description of 2016 Director Compensation*	10-K	1/19/16	10.32	000-15175

10.31	Description of 2017 Director Compensation*	10-K	1/20/17	10.32	000-15175

10.32	Description of 2018 Director Compensation*	10-K	1/22/18	10.29	000-15175

10.33	Description of 2019 and 2020 Director Compensation*	8-K	1/24/19	10.1	000-15175

10.34	Share Purchase Agreement by and among: Adobe, a Delaware corporation; Milestone Topco, Inc., a Delaware corporation; Vista Equity Partners Fund V, L.P., a Delaware limited partnership; Vista Equity Partners Fund V-A, L.P., a Cayman Island exempted limited partnership; Vista Equity Partners Fund V-B, L.P., a Cayman Island exempted limited partnership; VEPF V FAF, L.P., a Delaware limited partnership; Vista Equity Partners Fund V Executive, L.P., a Delaware limited partnership; Vista Equity Associates V, LLC, a Delaware limited liability company; Vista Equity Partners Fund VI, L.P., a Cayman Island exempted limited partnership; Vista Equity Partners Fund VI-A, L.P., a Cayman Island exempted limited partnership; VEPF VI FAF, L.P., a Cayman Island exempted limited partnership; and Vista Equity Partners Management, LLC, a Delaware limited liability company, as the Sellers’ Representative	8-K	9/21/18	2.1	000-15175

10.35A	2019 Equity Incentive Plan*	8-K	4/12/19	10.1	000-15175

10.35B	Form of Restricted Stock Unit Grant Notice and Award Agreement pursuant to 2019 Equity Incentive Plan*					X

10.35C	Form of Director Annual Grant Restricted Stock Unit Grant Notice and Award Agreement pursuant to 2019 Equity Incentive Plan*					X

31.1	Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934					X

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Incorporated by Reference**

Exhibit

Number

Exhibit Description

Form

Filing Date

Exhibit Number

SEC File No.

Filed

Herewith

31.2

Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934

32.1

Certification of Chief Executive Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934†

32.2

Certification of Chief Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934†

101.INS

XBRL Instance - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation

101.LAB

XBRL Taxonomy Extension Labels

101.PRE

XBRL Taxonomy Extension Presentation

101.DEF

XBRL Taxonomy Extension Definition

___________________________

Compensatory plan or arrangement.

References to Exhibits 10.9 and 10.10 are to filings made by Omniture, Inc.

†

The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Adobe Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

††

References to Exhibits 10.21 and 10.22 are to filings made by TubeMogul, Inc.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	ADOBE INC.

	By:	/s/ JOHN MURPHY
		John Murphy
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

Date: June 26, 2019

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SUMMARY OF TRADEMARKS

The following trademarks of Adobe Inc. or its subsidiaries, which may be registered in the United States and/or other countries, are referenced in this Form 10-Q:

Adobe

Acrobat

Allegorithmic

Behance

Creative Cloud

Magento

Marketo

Reader

All other trademarks are the property of their respective owners.

EXHIBIT 10.35B

Adobe Inc

2019 Equity Incentive Plan

Restricted Stock Unit Grant Notice

(Global)

Adobe Inc (the “Company”), pursuant to its 2019 Equity Incentive Plan (the “Plan”), hereby awards to Participant the Restricted Stock Unit Award (the “Award”) covering the number of Restricted Stock Units set forth below. This Award is subject to all of the terms and conditions as set forth herein and in the Restricted Stock Unit Award Agreement (the “Award Agreement”) and the Plan, each of which are incorporated herein in their entirety. Unless otherwise defined herein, capitalized terms shall have the meanings set forth in the Plan.



Participant:
Date of Grant:
Vesting Commencement Date:
Number of Restricted Stock Units:

Vesting Schedule: This Award shall vest as to 25% of the Restricted Stock Units on the first anniversary of the Vesting Commencement Date, and then 6.25% quarterly, thereafter so that the Restricted Stock Units are fully vested on the fourth anniversary of the Vesting Commencement Date; provided, however, that the Participant’s Service has not terminated prior to each such vesting date.Delivery of Shares: Subject to the limitations contained herein and the provisions of the Plan, the Company shall settle vested Restricted Stock Units by delivering to Participant in whole shares of Stock, as provided in Sections 3 and 5 of the Award Agreement.

Additional Terms/Acknowledgements: The Participant acknowledges receipt of, and understands and agrees to, this Restricted Stock Unit Award Grant Notice, the Restricted Stock Unit Award Agreement, and the Plan. The Participant further acknowledges that as of the Date of Grant, this Restricted Stock Unit Award Grant Notice, the Award Agreement, and the Plan set forth the entire understanding between Participant, the Company and any other applicable Participating Company regarding the Award and supersede all prior oral and written agreements on that subject with the exception of any applicable change of control plan approved by the Company’s Board of Directors or a committee thereof and/or an applicable individual written retention agreement or severance provision between the Company, or a subsidiary of the company and the Participant, to the extent applicable to the Participant (such documents, the “Superseding Agreements”).



	ADOBE INC

	By:
		Shantanu Narayen
		Chief Executive Officer
Address:		345 Park Avenue
		San Jose, CA 95110-2704 USA

Adobe Inc

2019 Equity Incentive Plan

Restricted Stock Unit Award Agreement

(Global)

Pursuant to the Restricted Stock Unit Grant Notice (“Grant Notice”) and this Award Agreement, including the attached Appendix, (“Award Agreement”), Adobe Inc (the “Company”) has awarded you, pursuant to its 2019 Equity Incentive Plan (the “Plan”), a Restricted Stock Unit Award for that number of Restricted Stock Units as indicated in the Grant Notice. Unless otherwise defined herein or in the Grant Notice, capitalized terms shall have the meanings set forth in the Plan. Subject to adjustment and the terms and conditions as provided herein and in the Plan, each Restricted Stock Unit shall represent the right to receive one (1) share of Stock.

The details of your Award, in addition to those set forth in the Grant Notice, are as follows.

1.Vesting.

(a)The Restricted Stock Units shall vest, if at all, as provided in the Vesting Schedule set forth in your Grant Notice, this Award Agreement and the Plan, provided that vesting shall cease upon the termination of your Service, except as otherwise set forth herein.

(b)If your Service terminates due to your death or Disability, then you will be given credit for an additional twelve (12) months of continuous Service such that the number of Restricted Stock Units that otherwise would have vested had your Service continued for an additional twelve (12) months following your termination will accelerate and become vested as of the date of your Service termination; provided, however, that in no event shall such applicable vesting exceed 100% of the number of Restricted Stock Units subject to your Award. For purposes of this provision, “Disability” shall mean your permanent and total disability within the meaning of Section 22(e)(3) of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), and any applicable regulations promulgated thereunder to the extent not inconsistent with the regulations under Section 409A of the Code. Except as set forth in this Section 1(b), any Restricted Stock Units subject to the Award that have not vested at the time of your termination of Service for any or no reason will be forfeited immediately and automatically transferred to and reacquired by the Company at no cost to the Company.

(c)For purposes of the Award, your Service will be considered terminated as of the date you are no longer actively providing Service to the Participating Company Group (regardless of the reason for such termination and whether or not later found to be invalid or in breach of employment laws in the jurisdiction where you are employed or the terms of your employment agreement, if any), and unless otherwise expressly provided in this Award Agreement or determined by the Participating Company Group, your right to vest in the Award under the Plan, if any, will terminate as of such date and will not be extended by any notice period (e.g., your period of service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where you are employed or the terms of your employment agreement, if any). The Committee shall have the exclusive discretion to determine when you are no longer actively providing Service for purposes of your Award (including whether you may still be considered to be providing Services while on a leave of absence). Any such determination by the Committee for the purposes of this Award Agreement shall have no effect upon

any determination of the rights or obligations of you or the Company (or any Participating Company, as applicable) for any other purpose.

(d)The Committee, in its discretion, may accelerate the vesting of the balance, or some lesser portion of the balance, of the unvested Restricted Stock Units at any time, subject to the terms of the Plan. If so accelerated, such Restricted Stock Units will be considered as having vested as of the date specified by the Committee. Notwithstanding Section 5 and in accordance with Section 16, the payment of shares of Stock vesting pursuant to this Section 1 shall in all cases be paid at a time or in a manner that is exempt from, or complies with, Section 409A.


2.	Number of Restricted Stock Units and Underlying Shares of Stock.

(a)The Restricted Stock Units subject to your Award and the shares of Stock deliverable with respect to such Restricted Stock Units will be adjusted from time to time for capitalization adjustments, as provided in Section 4.2 of the Plan.

(b)Any additional Restricted Stock Units, shares of Stock, cash or other property that become subject to the Award pursuant to this Section 2 shall be subject, in a manner determined by the Committee, to the same forfeiture restrictions, restrictions on transferability, and time and manner of delivery as applicable to the other Restricted Stock Units and shares of Stock covered by your Award.

(c)Notwithstanding the provisions of this Section 2, no fractional Restricted Stock Units or rights for fractional shares of Stock shall be created pursuant to this Section 2. The Board shall, in its discretion, determine an equivalent benefit for any fractional Restricted Stock Units or fractional shares that might be created by the adjustments referred to in this Section 2.

3.Payment by You. Subject to Section 12 below, and except as otherwise provided in the Grant Notice, you will not be required to make any payment to the Company with respect to your receipt of the Award, the vesting of the Restricted Stock Units, or the delivery of the shares of Stock underlying the Restricted Stock Units; provided, however, that your continued Service is required for vesting of the Restricted Stock Units as set forth in the Grant Notice and this Award Agreement.

4.Rights as a Stockholder. Neither you nor any person claiming under or through you will have any of the rights or privileges of a stockholder of the Company in respect of any shares of Stock hereunder unless and until certificates representing shares of Stock (or other evidence of ownership as so designated by the Company) (either, “Certificates”) will have been issued to you pursuant to Section 5. After such issuance, you will have all the rights of a stockholder of the Company with respect to voting such shares of Stock and receipt of dividends and other distributions on such shares of Stock.

5.Delivery of Shares. Each Restricted Stock Unit represents the right to receive one share of Stock on the date that such Restricted Stock Unit vests. Unless and until the Restricted Stock Units will have vested in the manner set forth in Section 1, you will have no right to payment of any such Restricted Stock Units. Except as provided in Section 6, any Restricted Stock Units that vest in accordance with Section 1 will be paid to you in whole shares of Stock as soon as practicable after vesting, but in each such case within the period thirty (30) days following the vesting date, subject to you satisfying any applicable tax withholding obligations as set forth in Section 12. In no event will you be permitted, directly or indirectly, to specify the taxable year of the payment of any Restricted Stock Units payable under this Award Agreement.

(a)Deferred Shares. If you are eligible and elect to defer delivery of the shares of Stock as provided in Section 6, such shares of Stock will be issued and delivered to you on the date or dates

that you elect on your deferral election form. No shares of Stock shall be issued prior to vesting of the Restricted Stock Units.

(b)Delivery Following Death. If you are deceased at the time that shares of Stock pursuant to Restricted Stock Units, if any, are to be delivered to you, such delivery will be made to your designated beneficiary, or if no beneficiary has survived you or been designated, or if the beneficiary designation is not enforceable and/or valid under the inheritance and other laws in your country (as determined by the Company in its sole discretion), to the administrator or executor of your estate. Any such transferee must furnish the Company with (i) written notice of his or her status as a transferee, and (ii) evidence satisfactory to the Company to establish the validity of the transfer and compliance with any laws or regulations pertaining to said transfer.

6.Deferral Election. If permitted by the Company to do so, you may elect to defer receipt of the shares of Stock that otherwise would be issued pursuant to the vesting of your Award in accordance with the terms and conditions, including the applicable eligibility requirements, of the Company’s Deferred Compensation Plan (or such other successor plan as may be adopted by the Company). The Committee will, in its sole discretion, establish the rules and procedures for such deferrals.

7.Compliance with Law. The grant of your Award and the issuance of any shares of Stock thereunder shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. You may not be issued any shares of Stock if such issuance of shares of Stock would constitute a violation of any applicable federal, state or foreign securities laws, any other governmental regulatory body, or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. You understand that the Company is under no obligation to register or qualify the shares with the United States Securities Exchange Commission or any state or foreign securities commission or to seek approval or clearance from any governmental authority for the issuance or sale of the shares of Stock.

In addition, you may not be issued any shares of Stock unless (i) a registration statement under the Securities Act shall at the time of issuance be in effect with respect to the shares of Stock or (ii) in the opinion of legal counsel to the Company, the shares of Stock may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. YOU ARE CAUTIONED THAT THE SHARES OF STOCK MAY NOT BE ISSUED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. Where the Company determines that the delivery of any shares of Stock to settle this Award would violate federal securities laws or other applicable laws or rules or regulations promulgated by any governmental agency, the Company will defer delivery until the earliest date at which the Company reasonably anticipates that delivery of shares of Stock will no longer cause such violation. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares of Stock shall relieve the Company of any liability in respect of the failure to issue or sell such shares of Stock as to which such requisite authority shall not have been obtained. As a condition to the issuance of any shares of Stock pursuant to this Award, the Company may require you to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company. Further, you agree that the Company shall have unilateral authority to amend the Plan and the Award Agreement without your

consent to the extent necessary to comply with securities or other laws applicable to issuance of shares of Stock.

8.Restrictive Legends. The shares of Stock issued pursuant to this Award shall be endorsed with appropriate legends, if any, determined by the Company.

9.Transferability. Except to the limited extent permitted under Section 5(b), this Award and the rights and privileges conferred hereby will not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and will not be subject to sale under execution, attachment, or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this grant, or any right or privileged conferred hereby, or upon any attempted sale under any execution, attachment or similar process, this Award and the rights and privileges hereby immediately will become null and void.

10.Award Not a Service Contract. Your Award is not an employment or service contract, and nothing in your Award shall be deemed to create in any way whatsoever any obligation on your part to continue in the service of the Participating Company Group, or on the part of the Participating Company Group to continue such service. In addition, nothing in your Award shall obligate the Participating Company Group, their respective stockholders, boards of directors, Officers or Employees to continue any relationship that you might have as an Employee, Director or Consultant for the Participating Company Group.

11.Unsecured Obligation. Your Award is unfunded, and even as to any Restricted Stock Units that vest, you shall be considered an unsecured creditor of the Company with respect to the Company’s obligation, if any, to issue shares of Stock pursuant to this Award Agreement. You shall not have voting or any other rights as a stockholder of the Company with respect to the shares of Stock acquired pursuant to this Award Agreement until such shares of Stock are issued to you pursuant to this Award Agreement. Upon such issuance, you will obtain full voting and other rights as a stockholder of the Company with respect to the shares of Stock so issued. Nothing contained in this Award Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other person.

12.Tax Obligations.

(a)General. Regardless of any action taken by the Company or any other Participating Company with respect to any or all federal, state, local and foreign income, employment, social insurance, payroll taxes, payment on account or other taxes related to your participation in the Plan and legally applicable to you or deemed by the Participating Company Group to be an appropriate charge to you even if technically due by the Participating Company Group (“Tax-Related Items”), you acknowledge that the ultimate liability for all Tax-Related Items, is, and remains, your responsibility. You further acknowledge that the Participating Company Group (i) makes no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of your Award, including, but not limited to, the grant, vesting or settlement of this Award, subsequent sale of Stock acquired pursuant to this Award, or the receipt of any dividends and/or Dividend Equivalents and (ii) does not commit to and is under no obligation to structure the terms of the grant or any other aspect of your Award to reduce or eliminate your liability for Tax-Related Items. Further, if you have become subject to tax in more than one jurisdiction, as applicable, you acknowledge that the Participating Company Group may be required to withhold or account for Tax-Related Items in more than one jurisdiction.

(b)Withholding Arrangements. Prior to any relevant taxable or tax withholding event, as applicable, you will pay or make adequate arrangements satisfactory to the Participating Company Group

to satisfy all Tax-Related Items. In this regard, you hereby authorize the Participating Company Group, or its respective agents, in their sole discretion and subject to any limitations under applicable law, to satisfy any applicable withholding obligations with regard to all Tax-Related Items by one or more of the following means:

withholding of that number of whole vested shares of Stock otherwise deliverable to you pursuant to this Award Agreement having a Fair Market Value not in excess of the amount of the withholding obligation for Tax-Related Items determined by the Company after considering required withholding rates and to the extent permitted under the Plan, the Company may determine such amount by considering other applicable withholding rates up to the maximum rate applicable in your jurisdiction. For tax purposes, you are deemed to have been issued the full number of shares of Stock subject to the vested Award, notwithstanding that a number of the shares of Stock are held back solely for the purpose of paying the Tax-Related Items;


ii.	withholding from proceeds of the sale of shares of Stock acquired upon vesting/settlement of the Award either through a voluntary sale or through a mandatory sale arranged by the Company (on your behalf pursuant to this authorization);


iii.	tender by you of a payment in cash or check to the Participating Company Group (as applicable) of any amount of the Tax-Related Items;


iv.	withholding by any Participating Company of any amount of the Tax-Related Items from your wages of any other compensation owed to you by any Participating Company; and/or


v.	in the event this Award is settled in whole or in part in cash, withholding from the cash to be distributed to you in settlement of this Award.

(c)Subject to Section 12(b)(i), to the extent the Company withholds for Tax-Related Items by using a rate higher than your applicable tax rate, you may receive a refund of any over-withheld amount in cash and you will have no entitlement to the equivalent amount in shares of Stock.

(d)You shall pay to the Participating Company Group (as applicable) any amount of Tax-Related Items that the Participating Company Group may be required to withhold or account for as a result of your participation in the Plan that cannot be satisfied by the means previously described. The Company shall have no obligation to issue or deliver shares, cash or the proceeds of the sale of Stock until you have satisfied the obligations in connection with the Tax-Related Items as described in this Section.

(e) Notwithstanding the foregoing, if you are a Section 16 officer of the Company under the Exchange Act, the Company will withhold using the method described under 12(b)(i) above unless the use of such withholding method is problematic under applicable laws or has materially adverse accounting consequences, in which case the Committee (as constituted to satisfy the requirements of

Exchange Act Rule 16b-3) shall determine which of the other methods described in Section 12(b) above shall be used to satisfy the withholding obligation for Tax-Related Items.

13.Nature of Award. In accepting your Award, you acknowledge, understand and agree that:

(a)the Plan is established voluntarily by the Company; it is discretionary in nature and it may be modified, amended, suspended or terminated by the Company at any time, to the extent permitted by the Plan;

(b)the grant of your Award is exceptional, voluntary and occasional and does not create any contractual or other right to receive future grants of Awards, or benefits in lieu of Awards, even if Awards have been granted in the past;

(c)all decisions with respect to future Awards or other grants, if any, will be at the sole discretion of the Company;

(d)the Award and your participation in the Plan shall not create a right to employment or be interpreted as forming an employment or service contract with the Participating Company Group and shall not interfere with any ability of the Participating Company Group to terminate your employment or service relationship (if any);

(e)you are voluntarily participating in the Plan;

(f)the Award and the Stock subject to the Award, and the income from and value of same, are not intended to replace any pension rights or compensation;

(g)the Award and the Stock subject to the Award, and the income from and value of same, are not part of normal or expected compensation or salary for purposes of calculating any severance, resignation, termination, redundancy, dismissal, end-of-service payments, holiday pay bonuses, long-service awards, pension or retirement or welfare benefits or similar mandatory payments;

(h)the future value of the underlying shares of Stock subject to your Award is unknown, indeterminable and cannot be predicted with certainty;

(i)no claim or entitlement to compensation or damages shall arise from forfeiture of the Award resulting from the termination of your Service with the Participating Company Group (for any reason whatsoever, whether or not later found to be invalid or in breach of employment laws in the jurisdiction where you are employed or the terms of your employment agreement, if any);

(j)unless otherwise provided in the Plan or by the Company in its discretion, the Award and the benefits evidenced by this Award Agreement do not create any entitlement to have the Award or any such benefits transferred to, or assumed by, another company nor to be exchanged, cashed

out or substituted for, in connection with any corporate transaction affecting the shares of the Company; and

(k) the following provisions apply only if you are providing Service outside the United States:


i.	the Award and the shares of Stock subject to the Award, and the income from and value of the same, are not part of normal or expected compensation or salary for any purpose;

ii.

unless otherwise agreed with the Company, the Award and the shares of Stock subject to the Award, and any income from and value of same, are not granted as consideration for, or in connection with, the service you may provide as a director of a Participating Company other than the Company; provided, however, that your continued Service shall be required for vesting of the Restricted Stock Units as may be set forth in the Grant Notice and this Award Agreement; and


iii.	the Participating Company Group shall not be liable for any foreign exchange rate fluctuation between your local currency and the United States Dollar that may affect the value of the Award or of any amounts due to you pursuant to the settlement of the Award or the subsequent sale of any shares of Stock acquired upon settlement.

14.Delivery of Documents and Notices. Any document relating to participating in the Plan or this Award and/or notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Award Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery, electronic delivery, or upon deposit in the U.S. Post Office or foreign postal service, by registered or certified mail, with postage and fees prepaid, or with a nationally recognized courier designating express or expedited service with evidence of delivery, addressed to the other party at the e-mail address, if any, provided for you by the Company or a Participating Company or at such other address as such party may designate in writing from time to time to the other party.

(a)Description of Electronic Delivery. The Plan and Award documents, which may include but do not necessarily include the Plan prospectus, Grant Notice, Award Agreement, Certificates, and United States financial reports of the Company, may be delivered to you electronically by the Company or a third party designated by the Company. Such means of delivery may include but do not necessarily include the delivery of a link to a Company intranet or the internet site of a third party involved in administering the Plan, the delivery of the document via e-mail or such other delivery determined at the Committee’s discretion.

(b)Consent to Electronic Delivery. You acknowledge that you have read Section 14 and consent to the electronic delivery of the Plan and Award documents by the Company or a third party designated by the Company and agree to participate in the Plan through any online or electronic system established and maintained by the Company or a third party designated by the Company, as described in Section 14. You acknowledge that you may receive from the Company a paper copy of any documents delivered electronically at no cost if you contact the Company by telephone, through a postal service or electronic mail at equity@adobe.com. You further acknowledge that you will be provided with a paper copy of any documents delivered electronically if electronic delivery fails; similarly, you understand that you must provide the Company or any designated third party with a paper copy of any documents delivered electronically if electronic delivery fails. Also, you understand that your consent may be revoked

or changed, including any change in the electronic mail address to which documents are delivered (if you have provided an electronic mail address), at any time by notifying the Company of such revised or revoked consent by telephone, postal service or electronic mail at equity@adobe.com. Finally, you understand that you are not required to consent to electronic delivery.

15.Data Privacy Consent. You understand that the Participating Company Group holds certain personal information about you, including, but not limited to, your name, home address, email address and telephone number, date of birth, social insurance number (to the extent permitted under applicable law), passport or other identification number, salary, nationality, job title, any shares of Stock or directorships held in the Company, details of all Awards or any other entitlement to shares of Stock awarded, canceled, exercised, vested, unvested or outstanding in your favor (all "Data"), for the exclusive purpose of implementing, administering and managing the Plan.

You understand that Data will be transferred to E*TRADE, or such other stock plan service provider as may be selected by the Company in the future, which is assisting the Company with the implementation, administration and management of the Plan. You understand that the recipients of the Data may be located in the United States or elsewhere, and that the recipients’ country (e.g., the United States) may have different data privacy laws and protections than your country. You understand that if you reside outside the United States, you may request a list with the names and addresses of any potential recipients of the Data by contacting your local human resources representative. You understand that Data will be held only as long as is necessary to implement, administer and manage your participation in the Plan. You understand that if you reside outside the United States, you may, at any time, view or access Data or require it to be provided to another company, request information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing your local human resources representative.

If you are an employee of an affiliate of the Company in the European Economic Area, or the United Kingdom (after the UK ceases to be a member state of the EU), the grant of consent below is not relevant to you. Company (and other authorized recipients of the Data) process the Data for the purpose of implementing, administering and managing the Plan; this is necessary in order to perform Company's contractual obligations under this RSU Grant Agreement. If you do not provide Data required for this purpose, Company will not be able to perform its obligations under this RSU Grant Agreement and this may affect your ability to participate in the Plan. The Company and E*TRADE have entered into standard contract clauses, in the form authorized by the European Commission, with its affiliates in the European Economic Area in order to provide adequate protection for Data. The Company is the controller responsible for the Data processing described above and can be contacted at 345 Park Avenue, San Jose, California 95110 USA, or AskPrivacy@adobe.com. You are entitled to complain to an EEA data protection authority in the country where you live, work, or believe any breach of data protection law has occurred.

Unless you are employee of an affiliate of the Company in the European Economic Area or the United Kingdom (after the UK ceases to be a member state of the EU)., you hereby explicitly and unambiguously consent to the collection, use and transfer, in electronic or other form, of your Data by and among the members of the Participating Company Group and by E*TRADE and any other company selected by Company to assist it in administering the Plan, for the exclusive purpose of implementing, administering and managing your participation in the Plan. Further, you understand that you are providing the consents herein on a purely voluntary basis. If you do not consent, or if you later seek to revoke your consent, your employment status or service with your employer will not be affected: the only consequence of refusing or withdrawing your consent is that the Company would not be able to grant Restricted Stock Units or other equity to you awards or administer or maintain such awards. Therefore, you understand that refusing or withdrawing your consent may affect your ability to participate in the

Plan. For more information on the consequences of your refusal to consent or withdrawal of consent, you understand that you may contact your local human resources representative.

16.Application of Section 409A (ONLY APPLICABLE TO U.S. TAXPAYERS). Absent a proper deferral election, it is intended that all of the benefits and payments provided under this Award satisfy, to the greatest extent possible, the exemptions from the application of Code Section 409A provided under the “short-term deferral” rule set forth in United States Treasury Regulation Section 1.409A‑1(b)(4), and this Award will be construed to the greatest extent possible as consistent with those provisions. To the extent not so exempt, this Award and the payments and benefits to be provided hereunder are intended to, and will be construed and implemented so as to, comply in all respects with the applicable provisions of Code Section 409A, and any provisions calling for payments on a termination of employment or other service shall be read to mean a “separation from service” (as defined under Treasury Regulation Section 1.409-1(h) without reference to alternative definitions thereunder). For purposes of Code Section 409A, each payment, installment and benefit under this Award is intended to constitute a separate payment for purposes of Treasury Regulation Section 1.409A‑2(b)(2). Notwithstanding any other provision of this Award, to the extent that (i) one or more of the payments or benefits received or to be received by you upon “separation from service” pursuant to this Plan would constitute deferred compensation subject to the requirements of Code Section 409A, and (ii) you are a “specified employee” within the meaning of Code Section 409A at the time of separation from service, then to the extent delayed commencement of any portion of such payments or benefits is required in order to avoid a prohibited distribution under Code Section 409A(a)(2)(B)(i) and the related adverse taxation under Section 409A, such payments and benefits shall not be provided to you prior to the earliest of (a) the expiration of the six-month period measured from the date of separation from service, (b) the date of your death or (c) such earlier date as permitted under Section 409A without the imposition of adverse taxation on you. Upon the first business day following the expiration of such applicable Code Section 409A(a)(2)(B)(i) period, all payments and benefits deferred pursuant to this paragraph shall be paid in a lump sum to you, and any remaining payments and benefits due shall be paid as otherwise provided herein.

17.Binding Agreement. Subject to the limitation on the transferability of this Award contained herein, the Award Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.

18.Committee Authority. The Committee will have the power to interpret the Plan and this Award Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules (including, but not limited to, the determination of whether or not any Restricted Stock Units have vested). All actions taken and all interpretations and determinations made by the Committee in good faith will be final and binding upon you, the Company and all other interested persons. No member of the Committee will be personally liable for

any action, determination or interpretation made in good faith with respect to the Plan or this Award Agreement.

19.Headings. The headings of the Sections in this Award Agreement are inserted for convenience only and shall not be deemed to constitute a part of this Award Agreement or to affect the meaning of this Award Agreement.

20.Miscellaneous.

(a)The rights and obligations of the Company under your Award shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company’s successors and assigns.

(b)You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your Award.

(c)You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.

21.Agreement Severable. The provisions of this Award Agreement are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.

22.Governing Plan Document. Your Award is subject to all the provisions of the Plan, which are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between one or more provisions of your Award Agreement and one or more provisions of the Plan, the provisions of the Plan shall control.

23.Applicable Law and Venue. The Award and the provisions of this Award Agreement shall be governed by, and subject to, the laws of the State of California, United States of America. For purposes of any action, lawsuit or other proceedings brought to enforce this Award Agreement, relating to it, or arising from it, the parties hereby submit to and consent to the sole and exclusive jurisdiction of Santa Clara County, California, or the federal courts of the United States for the Northern District of California, and no other courts, where this grant is made and/or to be performed.

24.No Advice Regarding Grant. The Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding your participation in the Plan, or your acquisition or sale of the underlying shares of Stock. You understand and agree that you should consult with your own personal tax, legal and financial advisors regarding your participation in the Plan before taking any action related to the Plan.

25.Language. If you received this Award Agreement or any other document related to the Plan translated into a language other than English and if the meaning of the translated version is different from the English version, the English version will control.

26.Appendix. Notwithstanding any provisions in this Award Agreement, the Award shall be subject to any special terms and conditions set forth in any Appendix to this Award Agreement for your country. Moreover, if you relocate to one of the countries included in the Appendix, the special terms and conditions for such country will apply to you, to the extent the Company determines that the application of

such terms and conditions is necessary or advisable for legal or administrative reasons. The Appendix constitutes part of this Award Agreement.

27.Imposition of Other Requirements. The Company reserves the right to impose other requirements on your participation in the Plan, on the Award and on any shares of Stock acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require you to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.

28.Waiver. You acknowledge that a waiver by the Company of a breach of any provision of this Award Agreement shall not operate or be construed as a waiver of any other provision of this Award Agreement, or of any subsequent breach by you or another Participant.

29.Insider Trading Restrictions/Market Abuse Laws. You acknowledge that you may be subject to insider-trading restrictions and/or market abuse laws in applicable jurisdictions, including the United States and your country of residence, which may affect your ability to acquire, sell or attempt to sell shares of Stock or rights to shares of Stock (e.g., the Award) during such times as you are considered to have “inside information” regarding the Company (as defined by the laws in applicable jurisdictions, including the United States and in your country). Any restrictions under these laws or regulations are separate from and in addition to any restrictions that may be imposed under any applicable Company insider trading policy. You should consult your personal legal advisor for further details regarding any insider trading restrictions and/or market-abuse laws in your country.

30.Foreign Asset/Account Reporting Requirements and Exchange Controls. Your country may have certain foreign asset and/or account reporting requirements and exchange controls which may affect your ability to acquire or hold shares of Stock under the Plan or cash received from participating in the Plan (including from any dividends received or sale proceeds arising from the sale of shares of Stock) in a brokerage or bank account outside your country. You may be required to report such accounts, assets or transactions to the tax or other authorities in your country. You also may be required to repatriate sale proceeds or other funds received as a result of your participation in the Plan to your country through a designated bank or broker and/or within a certain time after receipt. You acknowledge that it is your responsibility to be compliant with such regulations, and you should consult your personal legal advisor for any details.

Appendix to

Adobe Inc

2019 Equity Incentive Plan

Restricted Stock Unit Award Agreement

Non-Employee Director Grant

(Global)

This Appendix includes special country-specific terms that apply if you are residing and/or working in one of countries covered by the Appendix. The Appendix is part of the Award Agreement. Unless otherwise provided below, capitalized terms used but not defined herein shall have the same meanings assigned to them in the Plan and the Award Agreement.

This Appendix also includes information of which you should be aware with respect to your participation in the Plan. The information is based on the securities, exchange control and other laws in effect in the respective countries as of January 2019 and is provided solely for informational purposes. Such laws are often complex, change frequently, and results may differ based on the particular facts and circumstances. As a result, the Company strongly recommends that you do not rely on the information noted herein as the only source of information relating to the consequences of your participation in the Plan because the information may be out of date at the time your Award vests or you sell Stock acquired under the Plan.

In addition, the information is general in nature and may not apply to your particular situation, and the Company is not in a position to assure you of any particular result. Accordingly, you are advised to seek appropriate professional advice as to how the relevant laws in your country may apply to your situation.

Note that if you are a citizen or resident of a country other than the country in which you are residing and/or working, or you transfer employment or residency after the Award is granted to you, the information contained in this Appendix may not be applicable to you.

Australia

Australian Offer Document

The Award is intended to comply with the provisions of the Corporations Act 2001, Australian Securities and Investments Commission ("ASIC") Regulatory Guide 49 and ASIC Class Order 14/1000. Additional details are set forth in the Offer Document for the Award. Your right to participate in the Plan and receive the Award under the Plan is subject to the terms and conditions as stated in the Offer Document, the Plan

and the Award Agreement. By accepting the Award, you acknowledge and confirm that you have received these documents.

Tax Information

The Plan is a plan to which subdivision 83A-C of the Income Tax Assessment Act 1997 (Cth) applies (subject to conditions in that Act).

Exchange Control Information

Exchange control reporting is required for payments equal to or exceeding AUD10,000 to a foreign individual or entity. This reporting is generally done automatically by the financial institution making the transfer.

Austria

Exchange Control Information

If you hold shares of Stock purchased under the Plan outside of Austria (even if you hold them outside of Austria at a branch of an Austrian bank) or cash (including proceeds from the sale of shares of Stock), you must submit an annual report to the Austrian National Bank using the form “Wertpapiermeldung. An exemption applies if the value of the shares of Stock held outside of Austria does not exceed €5,000,000 as of 31 December each year or the value of the shares of Stock held outside of Austria as of any quarter does not exceed €30,000,000. The deadline for filing the annual report is January 31 of the following year and the deadline for filing the quarterly report is the 15th day of the month following the end of the respective quarter.

When shares of Stock are sold, there may be reporting obligations if the cash received is held outside Austria. If the transaction volume of all your cash accounts abroad exceeds €10,000,000, the movements and the balance of all accounts must be reported monthly, as of the last day of the month, on or before the fifteenth day of the following month with the form “Meldungen SI-Forderungen und/oder SI-Verpflichtungen.” If the transaction value of all cash accounts abroad is less than €10,000,000, no ongoing reporting requirements apply.

Belgium

Foreign Asset/Account Reporting Information

You are required to report any security or bank accounts (including brokerage accounts) you maintain outside of Belgium on your annual tax return. In a separate report, you are required to provide the National Bank of Belgium with certain details regarding such foreign accounts (including the account number, bank name and country in which any such account was opened). This report, as well as additional information on how to complete it, can be found on the website of the National Bank of Belgium, www.nbb.be, under Kredietcentrales / Centrales des crédits caption.

Bermuda

Securities Law Information

The Award Agreement is not subject to and has not received approval from the Bermuda Monetary Authority and the Registrar of Companies in Bermuda, and no statement to the contrary, explicit or implicit,

is authorized to be made in this regard. The securities may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act 2003 of Bermuda.

Brazil

Nature of Award

This provision supplements Section 13 of the Award Agreement:

By accepting this Award, you acknowledge, understand and agree that (i) you are making an investment decision, (ii) you will be entitled to receive shares of Stock pursuant to the Award only if the vesting conditions are met and any necessary services are rendered by you between the Date of Grant and the applicable vesting date, and (iii) the value of the underlying Shares of Stock is not fixed and may increase or decrease without compensation to you.

Compliance with Laws

By accepting this Award, you agree that you will comply with Brazilian law when you vest in your Award and sell shares of Stock. You also agree to report and pay any and all taxes associated with the vesting of the Award, the sale of the shares of Stock acquired pursuant to the Plan and the receipt of any dividends.

Exchange Control Information

You must prepare and submit a declaration of assets and rights held outside of Brazil to the Central Bank on an annual basis if you hold assets or rights valued at more than US$100,000. The assets and rights that must be reported include shares of Stock.

Canada (Quebec only)

Language Acknowledgment

The parties acknowledge that it is their express wish that this agreement, as well as all documents, notices and legal proceedings entered into, given or instituted pursuant hereto or relating directly or indirectly hereto, be provided to them in English.

Les parties reconnaissent avoir exigé la rédaction en anglais de cette convention, ainsi que de tous documents, avis et procédures judiciaires, exécutés, donnés ou intentés en vertu de, ou liés directement ou indirectement à, la présente convention.

Data Privacy

This provision supplements Section 15 of the Award Agreement:

You hereby authorize the Participating Company Group and their representatives to discuss with and obtain all relevant information from all personnel, professional or not, involved in the administration and operation of the Plan. You further authorize the Participating Company Group to disclose and discuss the Plan

with their advisors. You further authorize the Participating Company Group to record such information and to keep such information in your employee file.

Canada (all provinces)

Delivery of Shares

This provision supplements Section 5 of the Award Agreement:

Notwithstanding any discretion referred to in Section 2.1(ee) of the Plan, the Restricted Stock Units granted to Participants in Canada do not represent the right to receive a cash payment equal to the value of the shares of Stock, or a combination of cash and shares of Stock; vested Restricted Stock Units will be paid to Participants in Canada in shares of Stock only.

Securities Law Information

You acknowledge and agree that you will only sell shares of Stock acquired through participation in the Plan outside of Canada through E*TRADE or such other broker designated under the Plan, provided that such sale takes place outside of Canada through the facilities of a stock exchange on which the shares of Stock are listed. Currently, the shares of Stock are listed on Nasdaq Global Select Market.

Termination of Employment

This provision replaces Section 1(c) of the Award Agreement:

For purposes of the Award, your Service will be considered terminated, and your right to vest in the Award under the Plan, if any, (and any related Dividend Equivalents) will terminate, as of the date that is the earliest of: (a) the date your Service with the Participating Company Group is terminated, (b) the date you receive written notice of termination from the Participating Company Group, regardless of any notice period or period of pay in lieu of such notice mandated under the employment laws in the jurisdiction where you are employed or the terms of your employment agreement, if any; and (c) the date you are no longer employed by or actively providing Service to the Participating Company Group (regardless of the reason for such termination and whether or not later found to be invalid or in breach of the employment laws in the jurisdiction where you are employed or the terms of your employment agreement, if any). The Committee shall have the exclusive discretion to determine when you are no longer actively providing Service for purposes of your Award (including whether you may still be considered to be providing services while on an approved leave of absence).

Foreign Asset/Account Reporting Information

You may be required to report foreign specified property (including shares of Stock and rights to shares of Stock such as Restricted Stock Units) on form T1135 (Foreign Income Verification Statement) if the total cost of your foreign specified property exceeds C$100,000 at any time in the year. If applicable, the form must be filed by April 30 of the following year. When shares of Stock are acquired, their cost generally is the adjusted cost base (“ACB”) of the Stock. The ACB ordinarily would equal the fair market value of the Stock at the time of acquisition, but if you own other shares of Stock of the same Company, this ACB may

have to be leveraged with the ACB of the other Stock. Please refer to form T1135 (Foreign Income Verification Statement) and consult your tax advisor for further details.

Chile

Securities Law Information

The offer of Restricted Stock Units constitutes a private offering of securities in Chile effective as of the Date of Grant. The offer of Restricted Stock Units is made subject to general ruling N° 336 of the Chilean Superintendence of Securities and Insurance (“SVS”). The offer refers to securities not registered at the securities registry or at the foreign securities registry of the SVS, and, therefore, such securities are not subject to oversight of the SVS. Given that the Restricted Stock Units are not registered in Chile, the Company is not required to provide public information about the Restricted Stock Units or the shares of Stock in Chile. Unless the Restricted Stock Units and/or the shares of Stock are registered with the SVS, a public offering of such securities cannot be made in Chile.

Esta oferta de Unidades de Acciones Restringidas constituye una oferta privada de valores en Chile y se inicia en la Fecha de la Concesión. Esta oferta de Unidades de Acciones Restringidas se acoge a las disposiciones de la Norma de Carácter General N° 336 de la Superintendencia de Valores y Seguros de Chile (“SVS”). Esta oferta versa sobre valores no inscritos en el Registro de Valores o en el Registro de Valores Extranjeros que lleva la SVS, por lo que tales valores no están sujetos a la fiscalización de ésta. Por tratarse las Unidades de Acciones Restringidas de valores no registrados en Chile, no existe obligación por parte de la Compañía de entregar en Chile información pública respecto de los Unidades de Acciones Restringidas o sus Acciones. Estos valores no podrán ser objeto de oferta pública en Chile mientras no sean inscritos en el Registro de Valores correspondiente.

Exchange Control Information

Exchange control reporting requirements will apply if the value of any shares of Stock acquired without the remittance of funds out of Chile exceeds US$10,000. It is not clear whether this requirement also applies in the case of Restricted Stock Units where no payment is made to acquire the shares; however, if the Central Bank of Chile considers the acquisition of shares of Stock for no consideration to be an “investment operation” the requirement will apply. You should consult your personal legal advisor for further details.

You are not required to repatriate funds obtained from the sale of shares of Stock or any dividends to Chile. However, if you decide to repatriate such funds, you must do so through the Formal Exchange Market if the amount of the funds exceeds US$10,000. In such case, you must report the payment to a commercial bank or registered foreign exchange office receiving the funds.

If your aggregate investments held outside of Chile exceed US$5,000,000 in any year (including the investments made under the Plan), you must report the investments annually to the Central Bank.

Please note that exchange control regulations in Chile are subject to change. You should consult with your personal legal advisor regarding any exchange control obligations that you may have prior to the vesting of the Award or receiving proceeds from the sale of shares of Stock acquired under the Plan.

Tax Reporting Information and Registration

The Chilean Internal Revenue Service (“CIRS”) requires all taxpayers to provide information annually regarding: (i) any taxes paid abroad which will be used as a credit against Chilean income taxes, and (ii) the results of foreign investments on a sworn statement which must be submitted electronically through the

CIRS website at www.sii.cl. You should consult with your personal tax advisor with respect to your filing requirements.

China

Delivery of Shares: This provision replaces Section 5 of the Award Agreement:

Notwithstanding anything in the Award Agreement, the Restricted Stock Units granted to you do not provide any right to receive shares of Stock. Upon vesting, the Restricted Stock Units shall be settled and paid only in cash through local payroll in an amount equal to the fair market value of the shares of Stock at vesting less any Tax-Related Items. You agree to bear any currency fluctuation risk between the time the Restricted Stock Units vest and the time the cash payment is distributed to you.

Colombia

Labor Law Acknowledgement

By accepting this Award, you acknowledge that pursuant to Article 128 of the Colombia Labor Code, the Plan and related benefits do not constitute a component of “salary” for any purposes. Therefore, the Award and related benefits will not be included and/or considered for purposes of calculating any and all labor benefits, including but not limited to legal/fringe benefits, vacations, indemnities, payroll taxes and social insurance contributions.

Securities Law Information

The shares of Stock are not and will not be registered in the Colombian registry of publicly traded securities (Registro Nacional de Valores y Emisores) and therefore the shares of Stock may not be offered to the public in Colombia. Nothing in this Award Agreement should be construed as the making of a public offer of securities in Colombia.

Exchange Control Information

Investments in assets located abroad (including shares of Stock) are subject to registration with the Bank of the Republic if your aggregate investments held abroad (as of December 31 of the applicable calendar year) equal or exceed US$500,000. Registration is undertaken via lodgment of Form 11 and must be filed by June 30 of the year following that in which the investment was made. Upon sale or other disposition of investments (including shares of Stock) which have been registered with the Central Bank, the registration with the Central Bank must be cancelled no later than March 31 of the year following the sale or disposition (or a fine of up to 200% of the value of the infringing payment will apply). When investments held abroad are sold or otherwise disposed of, regardless of whether they have been registered with the Central Bank, you must repatriate the proceeds to Colombia by selling currency to a Colombian bank and filing the appropriate form.

Czech Republic

Exchange Control Information

The Czech National Bank may require you to fulfill certain notification duties in relation to the Award and the opening and maintenance of a foreign account (e.g., may be required to report foreign direct investments, financial credits from abroad, investment in foreign securities, and associated collections and payments). However, because exchange control regulations change frequently and without notice, you should consult your personal legal advisor prior to the vesting of the Award and the sale of shares of Stock

and before opening any foreign accounts in connection with the Plan to ensure compliance with current regulations. It is your responsibility to comply with any applicable Czech exchange control laws.

Denmark

Stock Option Act

You acknowledge that you have received an Employer Statement in Danish. To the extent more favorable to you and required to comply with the Stock Option Act, the terms set forth in the Employer Statement will apply to your participation in the Plan.

Foreign Asset/Account Reporting Information

You may hold shares of Stock acquired under the Plan in a safety-deposit account (i.e., a brokerage account) with either a Danish bank or with an approved foreign broker or bank. If the shares of Stock are held with a foreign broker or bank, you are required to inform the Danish Tax Administration about the safety-deposit account. For this purpose, you must file a Form V (Erklæring V) with the Danish Tax Administration. You must sign the Form V and by signing the Form V, you undertake an obligation, without further request each year to forward information to the Danish Tax Administration concerning the shares of Stock in the account. You can agree with the broker or bank that they undertake the required reporting, in which case the reporting should be undertaken no later than February 1 of the year following the calendar year to which the information relates. You have to file documentation that an agreement with the bank or broker is in place and that the bank or broker will provide the information to the Danish Tax Authorities. By signing the Form V, you authorize the Danish Tax Administration to examine the account.

In addition, if you open a brokerage account (or a deposit account with a U.S. bank), the brokerage account likely will be treated as a deposit account if cash can be held in the account. Therefore, you likely must also file a Form K (Erklæring K) with the Danish Tax Administration. You must sign the Form K, and by signing the Form K, you undertake an obligation, without further request each year to forward information to the Danish Tax Administration concerning the content of the deposit account. You can agree with the broker or bank that they undertake the required reporting, in which case the reporting should be undertaken no later than February 1 in the year following the calendar year to which the information relates. You have to file documentation that an agreement with the bank or broker is in place and that the bank or broker will provide the information to the Danish Tax Authorities. By signing the Form K, you authorize the Danish Tax Administration to examine the account.

Exchange Control Information

If you establish an account holding shares of Stock acquired from the Awards or an account holding cash outside Denmark, you must report the account to the Danish Tax Administration.

Finland

There are no country-specific provisions.

France

Language Consent

By accepting the Award and the Award Agreement, which provides for the terms and conditions of your Award, you confirm having read and understood the documents relating to this Award (the Plan and the

Award Agreement, including this Appendix) which were provided to you in English. You accept the terms of those documents accordingly.

En acceptant l’Attribution d'Actions Attribuées et ce Contrat d’Attribution qui contient les termes et conditions de vos Actions Attribuées, vous confirmez avoir lu et compris les documents relatifs à cette attribution (le Plan et le Contrat d’Attribution, ainsi que la présente Annexe) qui vous ont été transmis en langue anglaise. Vous acceptez ainsi les conditions et termes de ces documents.

Type of Award

The Awards are not intended to be French tax-qualified Awards.

Foreign Asset/Account Reporting Information

If you are a French resident and you hold cash or Stock outside of France, you must declare all foreign bank and brokerage accounts (including any accounts that were opened or closed during the tax year) on an annual basis on a special form, No. 3916, together with your income tax return. Further, if you are a French resident with foreign account balances exceeding €1,000,000, you may have additional monthly reporting obligations.

Germany

Exchange Control Information

Cross-border payments in excess of €12,500 must be reported monthly to the German Federal Bank (Bundesbank). The report must be filed electronically and the form of report (Allgemeine Meldeportal Statistik) can be accessed via the Bundesbank’s website (www.bundesbank.de). If you use a German bank to transfer a cross-border payment in excess of €12,500 in connection with the sale of shares of Stock acquired under the Plan, the bank will make the report for you. In addition, you must report any receivables, payables, or debts in foreign currency exceeding an amount of €5,000,000 on a monthly basis.

Hong Kong

Delivery of Shares

This provision supplements Section 5 of the Award Agreement:

Shares received under the Plan are accepted as a personal investment. In the event the Restricted Stock Units vest and shares of Stock are paid to Participant within six months of the Date of Grant, Participant agrees that he or she will not dispose of the shares of Stock acquired prior to the six-month anniversary of the Date of Grant.

Securities Law Information

Securities Warning: This offer of Restricted Stock Units and the shares of Stock to be issued pursuant to the Award is not a public offer of securities and is available only for Employees of the Participating Company Group. The Award Agreement, including this Appendix, the Plan and other incidental Award documentation have not been prepared in accordance with and are not intended to constitute a “prospectus” for a public offering of securities under the applicable securities legislation in Hong Kong, nor has the Award documentation been reviewed by any regulatory authority in Hong Kong. The Restricted Stock Units are intended only for the personal use of each eligible Employee, the Company and the Participating Company Group and may not be distributed to any other person. If you are in any

doubt about any of the contents of the Award Agreement, including this Appendix, or the Plan, you should obtain independent professional advice.

Nature of Scheme

The Company specifically intends that the Plan will not be an occupational retirement scheme for purposes of the Occupational Retirement Schemes Ordinance.

India

Exchange Control Information

You must repatriate all proceeds received from the sale of shares of Stock to India within 90 days of receipt for sale of Stock proceeds and within 180 days of receipt for dividends, or as prescribed under applicable Indian exchange control laws as may be amended from time to time. You must maintain the foreign inward remittance certificate received from the bank where the foreign currency is deposited in the event that the Reserve Bank of India or the Participating Company Group requests proof of repatriation. It is your responsibility to comply will applicable exchange control laws in India.

Foreign Asset/Account Reporting Information

You may be required to declare in your annual tax return (a) any foreign assets held by you (e.g., shares of Stock acquired under the Plan and, possibly, the Award), and (b) any foreign bank accounts for which you have signing authority.

Tax Information

The amount subject to tax will partially be dependent upon a valuation of the Shares that the Company will obtain from a Category 1 Merchant Banker registered with the Securities and Exchange Board of India. The Company has no responsibility or obligation to obtain the most favorable valuation possible nor obtain valuations more frequently than required under Indian tax law (which is generally every 180 days).

Ireland

Director Notification Requirement

If you are a director, shadow director or secretary of an Irish subsidiary, you must notify the Irish subsidiary in writing if (1) you receive or dispose of an interest exceeding 1% of the Company (e.g., the Award, shares of Stock, etc.), (2) you become aware of an event giving rise to a notification requirement, or (3) you become a director or secretary if such an interest exists at that time. This disclosure requirement also applies to any rights or shares acquired by your spouse or minor child(ren).

Israel

Immediate Sale of Shares of Stock

Upon the vesting of the Award, you agree to the immediate sale of any shares of Stock to be issued to you upon vesting and settlement of the Award. You further agree that the Company is authorized to instruct its designated broker to assist with the mandatory sale of such shares of Stock (on your behalf pursuant to this authorization) and you expressly authorize the Company’s designated broker to complete the sale of such shares of Stock. You acknowledge that the Company’s designated broker is under no obligation to arrange

for the sale of the shares of Stock at any particular price. Upon the sale of the shares of Stock, the Company agrees to pay you the cash proceeds from the sale of the shares of Stock, less any brokerage fees or commissions and subject to any obligation to satisfy Tax-Related Items. You acknowledge that you are not aware of any material nonpublic information with respect to the Company or any securities of the Company as of the date of this Award Agreement.

Italy

Plan Document Acknowledgment

By accepting this Award, you acknowledge that you have received a copy of the Plan, reviewed the Plan, the Award Agreement and this Appendix in their entirety and fully understand and accept all provisions of the Plan, the Award Agreement and this Appendix.

In addition, you further acknowledge that you have read and specifically and expressly approve the following Sections of the Award Agreement and this Appendix: Section 7 (Compliance with Law); Section 10 (Award Not a Service Contract); Section 12 (Tax Obligations); Section 13 (Nature of Award); Section 14 (Delivery of Documents and Notices); Section 22 (Governing Plan Document); Section 23 (Applicable Law and Venue); Section 26 (Appendix); Section 27 (Imposition of Other Requirements), as well as the Data Privacy provision below.

Foreign Asset/Account Reporting Information

You are required to report in your annual tax return: (a) any transfers of cash or shares of Stock to or from Italy; (b) any foreign investments or investments (including the shares of Stock issued at vesting of the Award, cash or proceeds from the sale of shares of Stock acquired under the Plan) held outside of, if the investment may give rise to income in Italy (this will include reporting the shares of Stock issued at vesting of the Award combined with other foreign assets); and (c) the amount of the transfers to and from abroad which have had an impact during the calendar year on your foreign investments or investments held outside of Italy. You are exempt from the formalities in (a) if the investments are made through an authorized broker resident in Italy, as the broker will comply with the reporting obligation on your behalf.

Japan

Foreign Asset/Account Reporting Information

You will be required to report details of any assets (including any shares of Stock acquired under the Plan) held outside of Japan as of December 31st of each year, to the extent such assets have a total net fair market value exceeding ¥50,000,000. Such report will be due by March 15th of the following year. You should consult with your personal tax advisor as to whether the reporting obligation applies to you and whether you will be required to report details of any outstanding Awards or shares of Stock held by you in the report.

Exchange Control Information

If the value of shares of Stock that may be acquired in any one transaction exceeds ¥100,000,000, you must notify the Ministry of Finance (“MOF”) within 20 days of acquisition.

Korea

Exchange Control Information

You are solely responsible for complying with applicable Korean exchange control regulations. Since the

exchange control regulations change frequently and without notice, you should consult your legal advisor to ensure compliance with current regulations.

Foreign Asset/Account Reporting Information

You will be required to declare all foreign accounts (i.e., non-Korean bank accounts, brokerage accounts, etc.) to the Korean tax authorities and file a report if the aggregate balance of such accounts exceeds a certain limit (currently KRW 500 million or an equivalent amount in foreign currency) on any month-end date during the year.

Mexico

Labor Law Policy and Acknowledgment

By accepting this Award, you expressly recognize that Adobe Inc, with offices at 345 Park Avenue, San Jose, California 95110, U.S.A., is solely responsible for the administration of the Plan and that your participation in the Plan and acquisition of shares does not constitute an employment relationship between you and the Company since you are participating in the Plan on a wholly commercial basis and your sole employer is Adobe Inc-Mexico Representative Office (“Adobe-Mexico”), not the Company in the United States. Based on the foregoing, you expressly recognize that the Plan and the benefits that you may derive from participation in the Plan do not establish any rights between you and your employer, Adobe-Mexico, and do not form part of the employment conditions and/or benefits provided by Adobe-Mexico and any modification of the Plan or its termination shall not constitute a change or impairment of the terms and conditions of your employment.

You further understand that your participation in the Plan is as a result of a unilateral and discretionary decision of the Company; therefore, the Company reserves the absolute right to amend and/or discontinue your participation at any time without any liability to you.

Finally, you hereby declare that you do not reserve to yourself any action or right to bring any claim against the Company for any compensation or damages regarding any provision of the Plan or the benefits derived under the Plan, and you therefore grant a full and broad release to the Company, its subsidiaries, affiliates, branches, representation offices, its shareholders, officers, agents or legal representatives with respect to any claim that may arise.

Política Laboral y Reconocimiento/Aceptación

Aceptando este Premio¹¹ El término “Premio” se refiere a la palabra “Award.”, El término “Premio” se refiere a la palabra “Award.”, el participante reconoce que Adobe Inc sus oficinas registradas en 345 Park Avenue, San Jose, California 95110, U.S.A., es el único responsable de la administración del Plan y que la participación del Participante en el mismo y la adquisicion de acciones no constituye de ninguna manera una relación laboral entre el Participante y la Compañía, toda vez que la participación del participante en el Plan deriva únicamente de una relación comercial con la Compañía, reconociendo expresamente que el único empleador del participante lo es Adobe Inc-Mexico Representative Office (“Adobe- México”), no es la Compañía en los Estados Unidos. Derivado de lo anterior, el participante expresamente reconoce que el Plan y los beneficios que pudieran derivar del mismo no establecen ningún derecho entre el participante y su empleador, Adobe-México, y no forman parte de las condiciones laborales y/o prestaciones otorgadas por Adobe-México, y expresamente

el participante reconoce que cualquier modificación el Plan o la terminación del mismo de manera alguna podrá ser interpretada como una modificación de los condiciones de trabajo del participante.

Asimismo, el participante entiende que su participación en el Plan es resultado de la decisión unilateral y discrecional de la Compañía, por lo tanto, la Compañía. Se reserva el derecho absoluto para modificar y/o terminar la participación del participante en cualquier momento, sin ninguna responsabilidad para el participante.

Finalmente, el participante manifiesta que no se reserva ninguna acción o derecho que origine una demanda en contra de la Compañía, por cualquier compensación o daño en relación con cualquier disposición del Plan o de los beneficios derivados del mismo, y en consecuencia el participante otorga un amplio y total finiquito a la Compañía, sus entidades relacionadas, afiliadas, sucursales, oficinas derepresentación, sus accionistas, directores, agentes y representantes legales con respecto a cualquier demanda que pudiera surgir.

¹El término “Premio” se refiere a la palabra “Award.”

Moldova

Exchange Control Information

You may be required to repatriate all proceeds received from the sale of shares of Stock to Moldova within a reasonable time from receipt. It is recommended that you consult with your personal tax advisor with respect to your requirements.

Netherlands

Insider-Trading Notification

You should be aware of the Dutch insider-trading rules, which may impact the sale of shares of Stock issued to you at vesting and settlement of the Award. In particular, you may be prohibited from effectuating certain transactions involving shares of Stock if you have inside information about the Company. If you are uncertain whether the insider-trading rules apply to you, you should consult your personal legal advisor.

New Zealand

Securities Law Information

WARNING: You are being offered Restricted Stock Units which allow you to acquire shares of Stock in accordance with the terms of the Plan and the Award Agreement. The shares of Stock, if issued, give you a stake in the ownership of the Company. You may receive a return if dividends are paid.

If the Company runs into financial difficulties and is wound up, you will be paid only after all creditors and holders of preferred shares have been paid.

New Zealand law normally requires people who offer financial products to give information to investors before they invest. This information is designed to help investors to make an informed decision. The usual rules do not apply to this offer because it is made under an employee share purchase scheme. As a result, you may not be given all the information usually required. You will also have fewer other legal protections for this investment. You understand that you should ask questions, read all documents carefully, and seek independent financial advice before participating in the Plan.

The shares of Stock are quoted and approved for trading on the NASDAQ Global Select Market in the United States of America. This means that, if you acquire shares of Stock under the Plan, you may be able to sell your investment on the NASDAQ if there are interested buyers. The price will depend on the demand for the shares of Stock.

For information on risk factors impacting the Company’s business that may affect the value of the shares

of Stock, you should refer to the risk factors discussion in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, which are filed with the U.S. Securities and Exchange Commission and are available online at www.sec.gov, as well as on the Company’s website at https://www.adobe.com/investor-relations/financial-documents.html. You are also entitled to receive a copy of these reports, free of charge, upon written request to the Company at 345 Park Ave. San Jose, CA 95110 Attention: Equity Administration

Norway

There are no country-specific provisions.

Poland

Exchange Control Information

Polish residents holding foreign securities (including shares of Stock) and maintaining accounts abroad must report information to the National Bank of Poland on transactions and balances of the securities and cash deposited in such accounts if the value of such transactions or balances exceeds PLN 7,000,000. If required, the reports must be filed on a quarterly basis by the 20^th day of the month following the end of each quarter on special forms available on the website of the National Bank of Poland. In addition, Polish residents are required to transfer funds through a bank account in Poland if the transferred amount in any single transaction exceeds a specified threshold (currently €15,000). You are required to retain the documents connected with a foreign exchange transaction for a period of five (5) years, as measured from the end of the year in which such transaction occurred.

Portugal

Exchange Control Information

If you acquire shares of Stock under the Plan and do not hold the shares of Stock with a Portuguese financial intermediary, you may need to file a report with the Portuguese Central Bank. If the shares of Stock are held by a Portuguese financial intermediary, it will file the report for you.

Language Consent

You hereby expressly declare that you have full knowledge of the English language and have read, understood and fully accepted and agreed with the terms and conditions established in the Plan and Award Agreement.

Conhecimento da Lingua

O Contratado, pelo presente instrumento, declara expressamente que tem pleno conhecimento da língua inglesa e que leu, compreendeu e livremente aceitou e concordou com os termos e condições estabelecidas no Plano e no Acordo de Atribuição (Award Agreement em inglês).

Romania

Exchange Control Information

If you deposit the proceeds from the sale of your shares of Stock or the receipt of dividends and/or Dividend Equivalents in a bank account in Romania, you may have to provide the Romanian bank through which the operations are effected with appropriate documentation regarding the receipt of the income. If you are a Romanian resident and acquire more than 10% of the share capital in a foreign entity (i.e., the Company), the acquisition is required to be reported to the National Bank of Romania (“NBR”) for statistical purposes. You should consult with a personal legal advisor to determine whether you will be required to submit such documentation to the Romanian bank.

Settlement of Award

In order to comply with the conditions as set forth by the Romanian Fiscal Code in relation to equity awards which are eligible for tax preferential treatment, where a portion of your Award vests prior to one year from the Date of Grant, settlement of the vested Award will be delayed until following the one year anniversary from the Date of Grant.

Russia

Securities Law Information

These materials do not constitute advertising or an offering of securities in Russia nor do they constitute placement of the shares of Stock in Russia. The shares of Stock issued pursuant to the Award have not and will not be registered in Russia, nor will they be admitted for listing on any Russian exchange for trading within Russia. Hence, the shares of Stock described herein may not be admitted or used for offering, placement or public circulation in Russia.

U.S. Transaction

Any shares of Stock issued pursuant to the Award shall be delivered to you through a brokerage account in the U.S. You may hold shares of Stock in your brokerage account in the U.S.; however, in no event will shares issued to you and/or share certificates or other instruments be delivered to you in Russia. You are not permitted to make any public advertising or announcements regarding the Award or shares of Stock in Russia, or promote these shares to other Russian legal entities or individuals, and you are not permitted to sell or otherwise dispose of shares of Stock directly to other Russian legal entities or individuals. You are permitted to sell shares of Stock only on the Nasdaq Global Select Market and only through a U.S. broker.

Data Privacy Consent.

This section supplements Section 15 of the Award Agreement.

You hereby explicitly and unambiguously consent to the collection, use and transfer, in electronic or other form, of your personal data as described in this document by and among the members of the Participating Company Group for the exclusive purpose of implementing, administering and managing your participation in the Plan.

You understand that the Participating Company Group holds certain personal information about you, including, but not limited to, your name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of Stock or directorships held in the Company, details of all Awards or any other entitlement to shares of Stock awarded, canceled,

exercised, vested, unvested or outstanding in the Participant’s favor (“Data”), for the purpose of implementing, administering and managing the Plan.

You understand that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in your country or elsewhere, and that the recipient’s country may have different data privacy laws and protections than your country. You understand that you may request a list with the names and addresses of any potential recipients of the Data by contacting equity@adobe.com. You authorize the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing your participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom you may elect to deposit any shares of Stock acquired upon vesting and settlement of the Award. You understand that Data will be held only as long as is necessary to implement, administer and manage your participation in the Plan. You understand that you may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing equity@adobe.com. Further, you understand that you are providing the consents herein on a purely voluntary basis. If you do not consent, or if you later seek to revoke your consent, your employment status or service and career with the Employer will not be adversely affected: the only consequence of refusing or withdrawing your consent is that the Company would not be able to grant you Restricted Stock Units or other equity awards or administer or maintain such awards. You understand, however, that refusing or withdrawing your consent may affect your ability to participate in the Plan. For more information on the consequences of your refusal to consent or withdrawal of consent, you understand that you may contact equity@adobe.com.

Foreign Asset/Account Restrictions

Certain individuals who hold public office in Russia, as well as their spouses and dependent children, are prohibited from opening or maintaining foreign brokerage or bank accounts and holding any securities, whether acquired directly or indirectly, in a foreign company (including shares of Stock acquired under the Plan).

Foreign Asset/Account Reporting Information

You will be required to notify Russian tax authorities within one (1) month of opening, closing or changing the details of a foreign account. Russian residents also are required to report (i) the beginning and ending balances in such a foreign bank accounts each year and (ii) transactions related to such foreign accounts during the year to the Russian tax authorities, on or before June 1 of the following year. The tax authorities can require you to provide appropriate supporting documents related to transactions in a foreign bank account.

Exchange Control Information

Within a reasonably short time after receipt, you are required to repatriate certain cash amounts received in connection with the Plan, including Dividend Equivalents and proceeds from the sale of shares of Stock acquired under the Plan, from your U.S. brokerage account to Russia as soon as you intend to use those amounts for any purpose, including reinvestment. Such funds must be initially credited to you through a foreign currency account at an authorized bank in Russia. After the funds are initially received in Russia, they may be further remitted to foreign banks in accordance with Russian exchange control laws.

As an express statutory exception to this repatriation requirement, cash dividends paid on shares of Stock can be paid directly into a foreign bank or brokerage account opened with a bank located in Organisation

for Economic Cooperation Development (“OECD”) or Financial Action Task Force (“FATF”) countries (e.g., the United States) without first remitting them to a bank account in Russia. As of January 1, 2018, cash proceeds from the sale of shares listed on one of the foreign stock exchanges on the list provided for by the Russian Federal law “On the Securities Market” (which currently includes the NASDAQ Global Select Market) can also be paid directly to a foreign bank or brokerage account opened with a bank located in an OECD or FATF country. Other statutory exceptions may also apply.

Singapore

Chief Executive Officer and Director Notification Requirement

If you are a director, associate director or shadow director or the chief executive officer (“CEO”) of a Singapore company, you are subject to certain notification requirements under the Singapore Companies Act. Among these requirements is an obligation to notify the Singapore company in writing when you receive an interest (e.g., Awards, shares of Stock) in the Company or any related companies. In addition, you must notify the Singapore company when you dispose of an interest in the Company or any related company (including when you sell shares of Stock acquired pursuant to your Award). These notifications must be made within two business days of acquiring or disposing of any interest in the Company or any related company. In addition, a notification must be made of your interests in the Company or any related company within two business days of becoming a director or the CEO.

Securities Law Information

The award of Restricted Stock Units is being made in pursuant to the "Qualifying Person" exemption under section 273(1)(f) of the Securities and Futures Act (Chap. 289) (“SFA”). The Plan has not and will not been lodged or registered as a prospectus with the Monetary Authority of Singapore. Hence, statutory liability under the SFA in relation to the content of prospectuses will not apply.

You should note that the Restricted Stock Units are subject to section 257 of the SFA. Therefore, the Restricted Stock Units may not be offered or sold, or made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore, unless such offer, sale or invitation is made (i) more than six (6) months from the Date of Grant, (ii) pursuant to the exemptions under Part XIII Division 1 Subdivision (4) (other than section 280) of the SFA, or (iii) pursuant to, and in accordance with the conditions of, any other applicable provisions of the SFA.

South Africa

Exchange Control Information

You are solely responsible for complying with applicable South African exchange control regulations. Since the exchange control regulations change frequently and without notice, you should consult your legal advisor prior to the acquisition or sale of Stock under the Plan to ensure compliance with current regulations. As noted, it is your responsibility to comply with South African exchange control laws, and the Participating Company Group will not be liable for any fines or penalties resulting from failure to comply with applicable laws.

Tax Information

By accepting the Award, you agree that, immediately upon vesting of the Award, you will notify your

employer of the amount of any gain realized. If you fail to advise your employer of the gain realized upon vesting, you may be liable for a fine. You will be solely responsible for paying any difference in the actual tax liability and for the amount withheld by your employer. It is recommended that you consult with your

personal tax advisor with respect to your requirements.

Spain

Securities Law Information

No “offer of securities to the public,” as defined under Spanish law, has taken place or will take place in the Spanish territory in connection with the Award. The Award Agreement (including the Appendix) and any other document related to the Award have not been nor will they be registered with the Comisión Nacional del Mercado de Valores, and they do not constitute a public offering prospectus.

Foreign Asset/Account Reporting Information

You are required to report assets or rights deposited or held outside of Spain (e.g., Stock deposited outside Spain or bank accounts held outside Spain) to the Spanish tax authorities on your annual tax return. This reporting obligation is based on the value of those rights and assets as of December 31 and has a threshold of €50,000 per type of asset (bank account, shares, real estate, etc.).

Please note that reporting requirements are based on what you have previously disclosed and the increase in value of such and the total value of certain groups of foreign assets. Also, the thresholds for annual filing requirements may change each year. Therefore, you should consult your personal advisor regarding whether you will be required to file an informational tax report for asset and rights that you hold abroad.

Exchange Control Information

You must declare the acquisition, ownership and disposition of stock in a foreign company (including shares of Stock acquired under the Plan) to the Spanish Dirección General de Comercio e Inversiones (the “DGCI”), the Bureau for Commerce and Investments, which is a department of the Ministry of Economy and Competitiveness, for statistical purposes. Generally, the declaration must be made in January for shares of Stock acquired or sold during (or owned as of December 31 of) the prior year; however, if the value of shares acquired or sold exceeds €1,502,530 (or you hold 10% or more of the shares capital of the Company or such other amount that would entitle you to join the Company’s board of directors), the declaration must be filed within one month of the acquisition or sale, as applicable.

You may be required to declare electronically to the Bank of Spain any securities accounts (including brokerage accounts held abroad), any foreign instruments (e.g., shares of Stock) and any transactions with non-Spanish residents (including any payments of cash or shares made to you by the Company) if the balances in such accounts together with the value of such instruments as of December 31, or the volume of transactions with non-Spanish residents during the prior or current year, exceeds €50,000. Once the €50,000 threshold has been surpassed in either respect, you will generally be required to report all foreign accounts, foreign instruments and transactions with non-Spanish residents, even if the relevant threshold

has not been crossed for an individual item. Generally, you will only be required to report on an annual basis (by March 31 of each year).

Labor Law Acknowledgment

By accepting the Award, you consent to participation in the Plan and acknowledge that you have received a copy of the Plan document.

You understand that the Company has unilaterally, gratuitously, and in its sole discretion decided to make grants of Awards under the Plan to Employees, Directors and Consultants throughout the world. The decision is limited and entered into based upon the express assumption and condition that any Awards will not economically or otherwise bind the Participating Company Group, including your employer, on an ongoing basis, other than as expressly set forth in the Award Agreement and the Plan. Consequently, you understand that the Awards are given on the assumption and condition that the Awards shall not become part of any employment contract (whether with the Participating Company Group, including your employer) and shall not be considered a mandatory benefit, salary for any purpose (including severance compensation), or any other right whatsoever. Furthermore, you understand and freely accept that there is no guarantee that any benefit whatsoever shall arise from the grant of Awards, which is gratuitous and discretionary, because the future value of the Awards and the underlying shares of Stock is unknown and unpredictable.

You understand and agree that, as a condition of the grant of the Awards, your termination of Service for any reason other than death or disability (including for the reasons listed below) will automatically result in the cancellation and loss of any Awards that may have been granted to you and that were not or did not become vested on the date of termination of Service. In particular, you understand and agree that, unless otherwise expressly provided by the Company in the Award Agreement, the Awards will be cancelled without entitlement to the shares or to any amount as indemnification if you terminate Service by reason of, but not limited to, the following: resignation; disciplinary dismissal adjudged to be with cause; disciplinary dismissal adjudged or recognized to be without good cause (i.e., subject to a "despido improcedente"); individual or collective layoff on objective grounds, whether adjudged to be with cause or adjudged or recognized to be without cause; material modification of the terms of employment under Article 41 of the Workers’ Statute; relocation under Article 40 of the Workers’ Statute; Article 50 of the Workers’ Statute; unilateral withdrawal by your employer; and under Article 10.3 of Royal Decree 1382/1985.

You also understand that this grant of Awards would not be made but for the assumptions and conditions set forth above; thus, you understand, acknowledge and freely accept that, should any or all of the assumptions be mistaken or any of the conditions not be met for any reason, the grant, the Awards and any right to the underlying shares of Stock shall be null and void.

Sweden

There are no country-specific provisions.

Switzerland

Securities Law Information

The Award and the issuance of any shares of Stock thereunder is not intended to be publicly offered in or from Switzerland. Neither this Award Agreement nor any other materials relating to the Award (1) constitute a prospectus as such term is understood pursuant to article 652a of the Swiss Code of Obligations, (2) may be publicly distributed nor otherwise made publicly available in Switzerland, or (3) have been or

will be filed with, approved or supervised by any Swiss regulatory authority (in particular, the Swiss Financial Market Supervisory Authority (FINMA)).

Taiwan

Exchange Control Information

You may remit foreign currency (including proceeds from the sale of shares of Stock) into or out of Taiwan up to US$5,000,000 per year without special permission. However, all remittances must be made through an authorized foreign exchange bank.

Securities Law Information

The Award and the shares of Stock to be issued pursuant to the Plan are available only to employees of the Participating Company Group. The grant of the Award does not constitute a public offer of securities.

Turkey

Securities Law Information

Under Turkish law, you are not permitted to sell shares of Stock acquired under the Plan in Turkey. The shares of Stock are currently traded on the Nasdaq Global Select Market, which is located outside of Turkey, under the ticker symbol “ADBE” and the shares of Stock may be sold through this exchange.

United Arab Emirates

Securities Law Information

Participation in the Plan is being offered only to selected Employees, Directors and Consultants and is in the nature of providing equity incentives to Employees, Directors and Consultants in the United Arab Emirates. The Plan and the Award Agreement are intended for distribution only to such Employees, Directors and Consultants and must not be delivered to, or relied on by, any other person. Prospective purchasers of the securities offered should conduct their own due diligence on the securities. If you do not understand the contents of the Plan and the Award Agreement, you should consult an authorized financial adviser. The Emirates Securities and Commodities Authority has no responsibility for reviewing or verifying any documents in connection with the Plan. Neither the Ministry of Economy nor the Dubai Department of Economic Development have approved the Plan or the Award Agreement nor taken steps to verify the information set out therein, and have no responsibility for such documents.

United Kingdom

Tax Obligations

The following supplements Section 12 of the Award Agreement:

Without limitation to Section 12 of the Award Agreement, you hereby agree that you are liable for all Tax-Related Items and hereby covenant to pay all such Tax-Related Items, as and when requested by the Company or (if different) your employer or by Her Majesty's Revenue & Customs ("HMRC") (or any other tax authority or any other relevant authority). You also hereby agree to indemnify and keep indemnified the Company and (if different) your employer against any Tax-Related Items that they are required to pay or withhold on your behalf or have paid or will pay to HMRC (or any other tax authority or any other relevant authority).

EXHIBIT 10.35C

Adobe Inc

2019 Equity Incentive Plan

Restricted Stock Unit Grant Notice

Non-Employee Director Grant

(Global)



Participant:
Date of Grant:
Vesting Commencement Date:
Number of Restricted Stock Units:

Vesting Schedule: This Award shall vest 100% so that the Restricted Stock Units are fully vested on the day immediately preceding the date of the next Annual Meeting of Stockholders; provided, however, that the Participant’s Service has not terminated prior to each such vesting date.

In the event of a Change of Control, any unvested portions of this Award shall become immediately vested in full as of immediately prior to the effective date of the Change of Control, subject to the consummation of the Change of Control.

Delivery of Shares: Subject to the limitations contained herein and the provisions of the Plan, the Company shall settle vested Restricted Stock Units by delivering to Participant in whole shares of Stock, as provided in Sections 3 and 5 of the Award Agreement.

company and the Participant, to the extent applicable to the Participant (such documents, the “Superseding Agreements”).



	ADOBE INC

	By:
		Shantanu Narayen
		Chief Executive Officer
Address:		345 Park Avenue
		San Jose, CA 95110-2704 USA

Adobe Inc

2019 Equity Incentive Plan

Restricted Stock Unit Award Agreement

Non-Employee Director Grant

(Global)

The details of your Award, in addition to those set forth in the Grant Notice, are as follows.

1.Vesting.

any determination of the rights or obligations of you or the Company (or any Participating Company, as applicable) for any other purpose.


2.	Number of Restricted Stock Units and Underlying Shares of Stock.

(a)Deferred Shares. If you are eligible and elect to defer delivery of the shares of Stock as provided in Section 6, such shares of Stock will be issued and delivered to you on the date or dates

that you elect on your deferral election form. No shares of Stock shall be issued prior to vesting of the Restricted Stock Units.

consent to the extent necessary to comply with securities or other laws applicable to issuance of shares of Stock.

8.Restrictive Legends. The shares of Stock issued pursuant to this Award shall be endorsed with appropriate legends, if any, determined by the Company.

12.Tax Obligations.

(b)Withholding Arrangements. Prior to any relevant taxable or tax withholding event, as applicable, you will pay or make adequate arrangements satisfactory to the Participating Company Group


ii.	withholding from proceeds of the sale of shares of Stock acquired upon vesting/settlement of the Award either through a voluntary sale or through a mandatory sale arranged by the Company (on your behalf pursuant to this authorization);


iii.	tender by you of a payment in cash or check to the Participating Company Group (as applicable) of any amount of the Tax-Related Items;


iv.	withholding by any Participating Company of any amount of the Tax-Related Items from your wages of any other compensation owed to you by any Participating Company; and/or


v.	in the event this Award is settled in whole or in part in cash, withholding from the cash to be distributed to you in settlement of this Award.

Exchange Act Rule 16b-3) shall determine which of the other methods described in Section 12(b) above shall be used to satisfy the withholding obligation for Tax-Related Items.

13.Nature of Award. In accepting your Award, you acknowledge, understand and agree that:

(c)all decisions with respect to future Awards or other grants, if any, will be at the sole discretion of the Company;

(e)you are voluntarily participating in the Plan;

(f)the Award and the Stock subject to the Award, and the income from and value of same, are not intended to replace any pension rights or compensation;

(h)the future value of the underlying shares of Stock subject to your Award is unknown, indeterminable and cannot be predicted with certainty;

out or substituted for, in connection with any corporate transaction affecting the shares of the Company; and

(k) the following provisions apply only if you are providing Service outside the United States:


i.	the Award and the shares of Stock subject to the Award, and the income from and value of the same, are not part of normal or expected compensation or salary for any purpose;

ii.


iii.	the Participating Company Group shall not be liable for any foreign exchange rate fluctuation between your local currency and the United States Dollar that may affect the value of the Award or of any amounts due to you pursuant to the settlement of the Award or the subsequent sale of any shares of Stock acquired upon settlement.

Plan. For more information on the consequences of your refusal to consent or withdrawal of consent, you understand that you may contact your local human resources representative.

any action, determination or interpretation made in good faith with respect to the Plan or this Award Agreement.

20.Miscellaneous.

(b)You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your Award.

such terms and conditions is necessary or advisable for legal or administrative reasons. The Appendix constitutes part of this Award Agreement.

Appendix to

Adobe Inc

2019 Equity Incentive Plan

Restricted Stock Unit Award Agreement

Non-Employee Director Grant

(Global)

Australia

Australian Offer Document

and the Award Agreement. By accepting the Award, you acknowledge and confirm that you have received these documents.

Tax Information

The Plan is a plan to which subdivision 83A-C of the Income Tax Assessment Act 1997 (Cth) applies (subject to conditions in that Act).

Exchange Control Information

Austria

Exchange Control Information

Belgium

Foreign Asset/Account Reporting Information

Bermuda

Securities Law Information

is authorized to be made in this regard. The securities may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act 2003 of Bermuda.

Brazil

Nature of Award

This provision supplements Section 13 of the Award Agreement:

Compliance with Laws

Exchange Control Information

Canada (Quebec only)

Language Acknowledgment

Data Privacy

This provision supplements Section 15 of the Award Agreement:

their advisors. You further authorize the Participating Company Group to record such information and to keep such information in your employee file.

Canada (all provinces)

Delivery of Shares

This provision supplements Section 5 of the Award Agreement:

Securities Law Information

Termination of Employment

This provision replaces Section 1(c) of the Award Agreement:

Foreign Asset/Account Reporting Information

have to be leveraged with the ACB of the other Stock. Please refer to form T1135 (Foreign Income Verification Statement) and consult your tax advisor for further details.

Chile

Securities Law Information

Exchange Control Information

If your aggregate investments held outside of Chile exceed US$5,000,000 in any year (including the investments made under the Plan), you must report the investments annually to the Central Bank.

Tax Reporting Information and Registration

CIRS website at www.sii.cl. You should consult with your personal tax advisor with respect to your filing requirements.

China

Delivery of Shares: This provision replaces Section 5 of the Award Agreement:

Colombia

Labor Law Acknowledgement

Securities Law Information

Exchange Control Information

Czech Republic

Exchange Control Information

and before opening any foreign accounts in connection with the Plan to ensure compliance with current regulations. It is your responsibility to comply with any applicable Czech exchange control laws.

Denmark

Stock Option Act

Foreign Asset/Account Reporting Information

Exchange Control Information

If you establish an account holding shares of Stock acquired from the Awards or an account holding cash outside Denmark, you must report the account to the Danish Tax Administration.

Finland

There are no country-specific provisions.

France

Language Consent

Award Agreement, including this Appendix) which were provided to you in English. You accept the terms of those documents accordingly.

Type of Award

The Awards are not intended to be French tax-qualified Awards.

Foreign Asset/Account Reporting Information

Germany

Exchange Control Information

Hong Kong

Delivery of Shares

This provision supplements Section 5 of the Award Agreement:

Securities Law Information

doubt about any of the contents of the Award Agreement, including this Appendix, or the Plan, you should obtain independent professional advice.

Nature of Scheme

The Company specifically intends that the Plan will not be an occupational retirement scheme for purposes of the Occupational Retirement Schemes Ordinance.

India

Exchange Control Information

Foreign Asset/Account Reporting Information

Tax Information

Ireland

Director Notification Requirement

Israel

Immediate Sale of Shares of Stock

Italy

Plan Document Acknowledgment

Foreign Asset/Account Reporting Information

Japan

Foreign Asset/Account Reporting Information

Exchange Control Information

If the value of shares of Stock that may be acquired in any one transaction exceeds ¥100,000,000, you must notify the Ministry of Finance (“MOF”) within 20 days of acquisition.

Korea

Exchange Control Information

You are solely responsible for complying with applicable Korean exchange control regulations. Since the

exchange control regulations change frequently and without notice, you should consult your legal advisor to ensure compliance with current regulations.

Foreign Asset/Account Reporting Information

Mexico

Labor Law Policy and Acknowledgment

Política Laboral y Reconocimiento/Aceptación

el participante reconoce que cualquier modificación el Plan o la terminación del mismo de manera alguna podrá ser interpretada como una modificación de los condiciones de trabajo del participante.

¹El término “Premio” se refiere a la palabra “Award.”

Moldova

Exchange Control Information

Netherlands

Insider-Trading Notification

New Zealand

Securities Law Information

If the Company runs into financial difficulties and is wound up, you will be paid only after all creditors and holders of preferred shares have been paid.

For information on risk factors impacting the Company’s business that may affect the value of the shares

Norway

There are no country-specific provisions.

Poland

Exchange Control Information

Portugal

Exchange Control Information

Language Consent

Conhecimento da Lingua

Romania

Exchange Control Information

Settlement of Award

Russia

Securities Law Information

U.S. Transaction

Data Privacy Consent.

This section supplements Section 15 of the Award Agreement.

exercised, vested, unvested or outstanding in the Participant’s favor (“Data”), for the purpose of implementing, administering and managing the Plan.

Foreign Asset/Account Restrictions

Foreign Asset/Account Reporting Information

Exchange Control Information

Singapore

Chief Executive Officer and Director Notification Requirement

Securities Law Information

South Africa

Exchange Control Information

Tax Information

By accepting the Award, you agree that, immediately upon vesting of the Award, you will notify your

personal tax advisor with respect to your requirements.

Spain

Securities Law Information

Foreign Asset/Account Reporting Information

Exchange Control Information

has not been crossed for an individual item. Generally, you will only be required to report on an annual basis (by March 31 of each year).

Labor Law Acknowledgment

By accepting the Award, you consent to participation in the Plan and acknowledge that you have received a copy of the Plan document.

Sweden

There are no country-specific provisions.

Switzerland

Securities Law Information

will be filed with, approved or supervised by any Swiss regulatory authority (in particular, the Swiss Financial Market Supervisory Authority (FINMA)).

Taiwan

Exchange Control Information

Securities Law Information

Turkey

Securities Law Information

United Arab Emirates

Securities Law Information

United Kingdom

Tax Obligations

The following supplements Section 12 of the Award Agreement:

EXHIBIT 31.1

CERTIFICATIONS

I, Shantanu Narayen, certify that:


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


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


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


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


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


(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


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


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


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


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


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



Dated: June 26, 2019	/s/ SHANTANU NARAYEN
	Shantanu Narayen
	President and Chief Executive Officer

EXHIBIT 31.2

CERTIFICATIONS

I, John Murphy, certify that:


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


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


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


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


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


(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


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


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


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


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


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



Dated: June 26, 2019	/s/ JOHN MURPHY
	John Murphy
	Executive Vice President and
	Chief Financial Officer

EXHIBIT 32.1

CERTIFICATIONS PURSUANT TO

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

AND 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Adobe Inc. (the “Registrant”) on Form 10-Q for the quarterly period ended May 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Shantanu Narayen, certify, in accordance with Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that to the best of my knowledge:


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


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



Dated: June 26, 2019	/s/ SHANTANU NARAYEN
	Shantanu Narayen
	President and Chief Executive Officer

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

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

EXHIBIT 32.2

CERTIFICATIONS PURSUANT TO

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

AND 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Adobe Inc. (the “Registrant”) on Form 10-Q for the quarterly period ended May 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Murphy, certify, in accordance with Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that to the best of my knowledge:


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


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



Dated: June 26, 2019	/s/ JOHN MURPHY
	John Murphy
	Executive Vice President and
	Chief Financial Officer