ADOBE INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

The following discussion should be read in conjunction with our Consolidated
Financial Statements and Notes thereto. Discussion regarding our financial
condition and results of operations for fiscal 2020 as compared to fiscal 2019
is included in Item 7 of our Annual Report on Form 10-K for the fiscal year
ended November 27, 2020, filed with the SEC on January 15, 2021.
                   CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our 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. We evaluate our assumptions, judgments and estimates
on a regular basis. 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 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.
Revenue Recognition
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.
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.
Business Combinations
We allocate the purchase price of acquired companies to tangible and intangible
assets acquired and liabilities assumed based upon their estimated fair values
at the acquisition date. The purchase price allocation process requires
management to make significant estimates and assumptions with respect to
intangible assets and deferred revenue obligations. Although we believe the
assumptions and estimates we have made are reasonable, they are based in part on
historical experience, market conditions and information obtained from
management of the acquired companies and are inherently uncertain. Examples of
critical estimates in valuing certain of the intangible assets we have acquired
or may acquire in the future include but are not limited to:
•future expected cash flows from software license sales, subscriptions, support
agreements, consulting contracts and acquired developed technologies and
patents;
•expected costs to develop acquired technologies and patents internally into
commercially viable products;
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•historical and expected customer attrition rates and anticipated growth in
revenue from acquired customers;
•the acquired company's trade name and trademarks as well as assumptions about
the period of time the acquired trade name and trademarks will continue to be
used in the combined company's product portfolio;
•the expected use of the acquired assets; and
•discount rates.
In connection with the purchase price allocations for our acquisitions, we
estimate the fair value of the deferred revenue obligations assumed. The
estimated fair value of these obligations is determined utilizing a cost
build-up approach. The cost build-up approach determines fair value by
estimating the costs related to fulfilling the obligations plus a normal profit
margin.
Unanticipated events and circumstances may occur which may affect the accuracy
or validity of such assumptions, estimates or actual results.
Accounting for Income Taxes
We use the asset and liability method of accounting for income taxes. Under this
method, income tax expense is recognized for the amount of taxes payable or
refundable for the current year. In addition, deferred tax assets and
liabilities are recognized for the expected future tax consequences of temporary
differences between the financial reporting and tax bases of assets and
liabilities, and for operating losses and tax credit carryforwards. Management
must make assumptions, judgments and estimates to determine our current
provision for income taxes and also our deferred tax assets and liabilities.
Our assumptions, judgments and estimates relative to the current provision for
income taxes take into account current tax laws, our interpretation of current
tax laws and possible outcomes of current and future audits conducted by foreign
and domestic tax authorities. We have established reserves for income taxes to
address potential exposures involving tax positions that could be challenged by
tax authorities. In addition, we are subject to the 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 research
and development tax credits, intercompany transfer pricing practices and 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 potential adjustments that may result from these examinations.
We believe such estimates to be reasonable; however, we cannot provide assurance
that the final determination of any of these examinations will not have a
significant impact on the amounts provided for income taxes in our Consolidated
Financial Statements.
Recent Accounting Pronouncements

See Note 1 of our Notes to Consolidated Financial Statements for information
regarding recent accounting pronouncements that are of significance, or
potential significance to us.

                                  ACQUISITIONS
In the fourth quarter of fiscal 2021, we completed the acquisition of Frame.io,
a privately held company that provides a cloud-based video collaboration
platform, for approximately $1.18 billion and we began integrating Frame.io into
our Digital Media reportable segment. In the first quarter of fiscal 2021, we
completed the acquisition of Workfront, a privately held company that provides a
workflow platform, for approximately $1.52 billion in cash consideration and we
began integrating Workfront into our Digital Experience reportable segment.

See Note 3 of our Notes to Consolidated Financial Statements for further
information regarding these acquisitions .

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                             RESULTS OF OPERATIONS
Overview of 2021
For our fiscal 2021, we experienced strong demand across our Digital Media
offerings consistent with the continued execution of our long-term plans with
respect to this segment. In our Digital Experience segment, we continued to
experience growth in software-based subscription revenue across our portfolio of
offerings. Our financial results for fiscal 2021 benefited from an extra week in
the first quarter of fiscal 2021 due to our 52/53 week financial calendar
whereby fiscal 2021 is a 53-week year compared with fiscal 2020 and 2019 which
were 52-week years.
Digital Media
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, machine learning
and artificial intelligence, 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 attracting new users with new
features and products, continuing to acquire users with our low cost of entry
and delivery of additional features and value to Creative Cloud, and delivering
new features and technologies to existing customers with our latest releases. 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.
We continue to implement strategies that are designed to 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 experience 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.
In October 2021, we acquired Frame.io, a privately held company that provides a
cloud-based video collaboration platform, and we began integrating Frame.io into
our Digital Media segment.
We are also a market leader with our Document Cloud offerings built around our
Adobe Acrobat family of products, including Adobe Acrobat Reader DC, and a set
of integrated mobile apps and cloud-based document services, including Adobe
Scan and 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 is offered both through subscription and perpetual licenses.
As part of our Creative Cloud and Document Cloud strategies, we utilize a
data-driven operating model ("DDOM") and our Adobe Experience Cloud solutions to
raise awareness of our products, drive new customer acquisition, engagement and
retention, and optimize customer journeys. As a result, we observed strong
growth in Digital Media revenue during fiscal 2021.
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
remaining performance obligations 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 exchange rate changes. Our reported ARR results
in the
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current fiscal year are based on currency rates set at the beginning of the year
and held constant throughout the year. We calculate ARR as follows:

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


Creative ARR exiting fiscal 2021 was $10.30 billion, up from $8.78 billion at
the end of fiscal 2020. Document Cloud ARR exiting fiscal 2021 was $1.93
billion, up from $1.47 billion at the end of fiscal 2020. Total Digital Media
ARR grew to $12.24 billion at the end of fiscal 2021, up from $10.26 billion at
the end of fiscal 2020. Revaluing our ending ARR for fiscal 2021 using currency
rates at the beginning of fiscal 2022, our Digital Media ARR at the end of
fiscal 2021 would be $12.15 billion or approximately $86 million lower than the
ARR reported above.
Our success in driving growth in ARR has positively affected our revenue growth.
Creative revenue in fiscal 2021 was $9.55 billion, up from $7.74 billion in
fiscal 2020 and representing 23% year-over-year growth. Document Cloud revenue
in fiscal 2021 was $1.97 billion, up from $1.50 billion in fiscal 2020 and
representing 32% year-over-year growth which reflected an increase in demand
driven by new user acquisition for our Document Cloud subscription offerings.
Total Digital Media segment revenue grew to $11.52 billion in fiscal 2021, up
from $9.23 billion in fiscal 2020 and representing 25% year-over-year growth.
These increases were driven by strong net new user growth, including those
resulting from the current work-from-home environment reflecting expanded
digital engagement.
Digital Experience
We are a market leader in the fast-growing category addressed by our Digital
Experience segment. The Adobe Experience Cloud applications, services and
platform are designed to manage customer journeys, enable shoppable experiences
and deliver intelligence for businesses of any size in any industry. Our
differentiation and competitive advantage is strengthened by our ability to use
the Adobe Experience Platform to connect our comprehensive set of solutions.
In December 2020, we acquired Workfront, a privately held company that provides
a workflow platform, and integrated Workfront into our Digital Experience
segment.
Adobe Experience Cloud delivers solutions for our customers across the following
strategic growth pillars:
•Data insights and audiences. Our solutions, including Adobe Analytics, Adobe
Experience Platform, Customer Journey Analytics, Adobe Audience Manager and our
Real-time Customer Data Platform, deliver robust customer profiles and
AI-powered analytics across the customer journey to provide timely, relevant
experiences across platforms.
•Content and commerce. Our solutions help customers manage, deliver and optimize
content delivery, through Adobe Experience Manager and to enable shopping
experiences that scale from mid-market to enterprise businesses, with Adobe
Commerce.
•Customer journeys. Our solutions help businesses manage, test, target,
personalize and orchestrate campaigns and customer journeys across B2E use
cases, including through Marketo Engage, Adobe Campaign, Adobe Target and
Journey Optimizer.
•Marketing workflow. We offer Adobe Workfront, a work management platform
directed toward marketers to orchestrate campaign workflows.
In addition to chief marketing officers, chief revenue officers and digital
marketers, users of our Digital Experience solutions include advertisers,
campaign managers, publishers, data analysts, content managers, social
marketers, marketing executives and information management and technology
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
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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 Digital Experience
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.
Digital Experience revenue was $3.87 billion in fiscal 2021, up from $3.13
billion in fiscal 2020 which represents 24% year-over-year growth. Driving this
increase was the increase in subscription revenue across our offerings which
grew to $3.38 billion in fiscal 2021 from $2.66 billion in fiscal 2020,
representing 27% year-over-year growth. Also contributing to the increase in
Digital Experience subscription revenue was revenue associated with Workfront's
workflow platform offerings. We expect that the addition of Workfront, and
continued demand across our portfolio of Digital Experience solutions, will
drive revenue growth in future years.
                                COVID-19 UPDATE
The COVID-19 pandemic continues to have widespread, rapidly-evolving and
unpredictable impacts on global societies, economies, financial markets and
business practices. As conditions fluctuate around the world, with vaccine
administration rising in certain regions, governments and organizations have
responded by adjusting their restrictions and guidelines accordingly. Our focus
remains on promoting employee health and safety, serving our customers and
ensuring business continuity. We carefully assess, and reassess, conditions on a
case-by-case basis to determine when employees can safely return to our offices
and resume business travel. As a result, we have reopened our offices in areas
with sustained low infection rates and are allowing fully vaccinated employees
to return on a voluntary basis. In addition, we are implementing our reimagined
framework for the future of work at Adobe, which is rooted in a flexible and
hybrid model enabled by a digital-first mindset.
During the pandemic, digital has become the primary way for people to connect,
work, learn and be entertained, and for businesses to engage with customers.
This ongoing shift to a digital-first world has increased the importance and
relevance of our solutions, which has contributed to our continued growth year
over year. However, while our revenue and earnings are relatively predictable as
a result of our subscription-based business model, the duration of the pandemic
and the broader implications of the macro-economic recovery on our business
remain uncertain.   S    ee     the section titled     "    Risk Factors    "
  in Part I, Item 1A     of this report     fo    r further discussion of the
possible impact of the pandemic on our business.
Financial Performance Summary for Fiscal 2021
Our financial results for fiscal 2021 benefited from an extra week in the first
quarter of fiscal 2021 due to our 52/53 week financial calendar whereby fiscal
2021 is a 53-week year compared with fiscal 2020 and 2019 which were 52-week
years.
•Total Digital Media ARR of approximately $12.24 billion as of December 3, 2021
increased by $1.98 billion, or 19%, from $10.26 billion as of November 27, 2020.
The change in our Digital Media ARR was primarily due to new user adoption of
our Creative Cloud and Document Cloud offerings.
•Creative revenue of $9.55 billion increased by $1.81 billion, or 23%, during
fiscal 2021, from $7.74 billion in fiscal 2020. Document Cloud revenue of $1.97
billion increased by $477 million, or 32%, during fiscal 2021, from $1.50
billion in fiscal 2020. The increases were primarily due to subscription revenue
growth associated with our Creative Cloud and Document Cloud offerings.
•Digital Experience revenue of $3.87 billion increased by $742 million, or 24%,
during fiscal 2021, from $3.13 billion in fiscal 2020. The increase was
primarily due to subscription revenue growth across our offerings, including
from our Workfront acquisition.
•Remaining performance obligations of $13.99 billion as of December 3, 2021
increased by $2.65 billion, or 23%, from $11.34 billion as of November 27, 2020,
primarily due to new contracts and renewals for our Digital Media and Digital
Experience offerings, as well as impacts from our Workfront acquisition.
•Cost of revenue of $1.87 billion increased by $143 million, or 8%, during
fiscal 2021, from $1.72 billion in fiscal 2020 primarily due to increases in
hosting services and data center costs, partially offset by decreases in
Advertising Cloud media costs.
•Operating expenses of $8.12 billion increased by $1.21 billion, or 17%, during
fiscal 2021, from $6.91 billion in fiscal 2020 primarily due to increases in
base and incentive compensation and related benefits costs, as well as increased
marketing spend.
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•Net income of $4.82 billion decreased by $438 million, or 8%, during fiscal
2021 from $5.26 billion in fiscal 2020 primarily due to the change in provision
for income taxes, which was largely driven by the non-recurring benefit from
income taxes recognized in fiscal 2020 associated with our intra-entity
transfers of certain intellectual property rights. To a lesser extent, net
income was also impacted by increases in operating expenses, offset by increases
in revenue.
•Net cash flows from operations of $7.23 billion during fiscal 2021 increased by
$1.50 billion, or 26%, from $5.73 billion in fiscal 2020 primarily due to higher
net income adjusted for the net effect of non-cash items and increases in
deferred revenue, partially offset by increases in trade receivables.
Revenue
                                                                               % Change
(dollars in millions)               2021           2020           2019         2021-2020
Subscription                     $ 14,573       $ 11,626       $  9,634             25  %
Percentage of total revenue            92  %          90  %          86  %
Product                               555            507            648              9  %
Percentage of total revenue             4  %           4  %           6  %
Services and other                    657            735            889            (11) %
Percentage of total revenue             4  %           6  %           8  %
Total revenue                    $ 15,785       $ 12,868       $ 11,171             23  %


Subscription
Our subscription revenue is comprised primarily of fees we charge for our
subscription and hosted service offerings, and related support, including
Creative Cloud and certain of our Adobe Experience Cloud and Document Cloud
services. We primarily recognize subscription revenue ratably over the term of
agreements with our customers, beginning with commencement of service.
Subscription revenue related to certain offerings, where fees are based on a
number of transactions and invoicing is aligned to the pattern of performance,
customer benefit and consumption, are recognized on a usage basis.
We have the following reportable segments: Digital Media, Digital Experience,
and Publishing and Advertising. Subscription revenue by reportable segment for
fiscal 2021, 2020 and 2019 is as follows:
                                                                                     % Change
          (dollars in millions)               2021          2020         2019        2021-2020
          Digital Media                    $ 11,048      $  8,813      $ 7,208            25  %
          Digital Experience                  3,379         2,660        2,280            27  %
          Publishing and Advertising            146           153          146            (5) %
          Total subscription revenue       $ 14,573      $ 11,626      $ 9,634            25  %


Product
Our product revenue is comprised primarily of fees related to licenses for
on-premise software purchased on a perpetual basis, for a fixed period of time
or based on usage for certain of our OEM and royalty agreements. We primarily
recognize product revenue at the point in time the software is available to the
customer, provided all other revenue recognition criteria are met.
Services and Other
Our services and other revenue is comprised primarily of fees related to
consulting, training, maintenance and support for certain on-premise licenses
that are recognized at a point in time and our advertising offerings. We
typically sell our consulting contracts on a time-and-materials and fixed-fee
basis. These revenues are recognized as the services are performed for time and
materials contracts and on a relative performance basis for fixed-fee contracts.
Training revenues are recognized as the services are performed. Our maintenance
and support offerings, which entitle customers, partners and developers to
receive desktop product upgrades and enhancements or technical support,
depending on the offering, are generally recognized ratably over the term of the
arrangement. Transaction-based advertising revenue is recognized on a usage
basis as we satisfy the performance obligations to our customers.
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Segments

In fiscal 2021, we categorized our products into the following reportable
segments:
•Digital Media-Our Digital Media segment provides products, services and
solutions that enable individuals, teams and enterprises to create, publish and
promote their content anywhere and accelerate their productivity by modernizing
how they view, share, engage with and collaborate on documents and creative
content. Our customers include creative professionals, including photographers,
video editors, graphic and experience designers and game developers,
communicators, including content creators, students, marketers and knowledge
workers, and consumers.
•Digital Experience-Our Digital Experience segment provides an integrated
platform and set of applications and services that enable brands and businesses
to create, manage, execute, measure, monetize and optimize customer experiences
that span from analytics to commerce. Our customers include marketers,
advertisers, agencies, publishers, merchandisers, merchants, web analysts, data
scientists, developers and executives across the C-suite.
•Publishing and Advertising-Our Publishing and Advertising segment contains
legacy products and services that address diverse market opportunities,
including eLearning solutions, technical document publishing, web conferencing,
document and forms platform, web application development, high-end printing and
our Adobe Advertising Cloud offerings.
Segment Information
                                                                               % Change
(dollars in millions)               2021           2020           2019         2021-2020
Digital Media                    $ 11,520       $  9,233       $  7,707             25  %
Percentage of total revenue            73  %          72  %          69  %
Digital Experience                  3,867          3,125          2,795             24  %
Percentage of total revenue            24  %          24  %          25  %
Publishing and Advertising            398            510            669            (22) %
Percentage of total revenue             3  %           4  %           6  %
Total revenue                    $ 15,785       $ 12,868       $ 11,171             23  %


Digital Media
Revenue by major offerings in our Digital Media reportable segment for fiscal
2021, 2020 and 2019 were as follows:
                                                                          % Change
(dollars in millions)               2021         2020         2019        2021-2020
Creative Cloud                   $  9,546      $ 7,736      $ 6,482            23  %
Document Cloud                      1,974        1,497        1,225            32  %
Total Digital Media revenue      $ 11,520      $ 9,233      $ 7,707            25  %


Revenue from Digital Media increased $2.29 billion during fiscal 2021 as
compared to fiscal 2020, driven by increases in revenue associated with our
Creative and Document Cloud subscription offerings due to continued demand amid
an increasingly digital environment and expanding subscription base.
Revenue associated with our Creative offerings, which includes our Creative
Cloud, increased during fiscal 2021 primarily due to increases in net new
subscriptions across our Creative Cloud offerings.
Document Cloud revenue, which includes our Acrobat product family and Adobe Sign
service, increased during fiscal 2021 primarily due to increases in subscription
revenue driven by strong new user acquisition of our Document Cloud offerings.
Digital Experience
Revenue from Digital Experience increased $742 million during fiscal 2021, as
compared to fiscal 2020 primarily due to subscription revenue growth across our
offerings including from our Workfront acquisition.
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Geographical Information
                                                                               % Change
(dollars in millions)               2021           2020           2019         2021-2020
Americas                         $  8,996       $  7,454       $  6,506             21  %
Percentage of total revenue            57  %          58  %          58  %
EMEA                                4,252          3,400          2,975             25  %
Percentage of total revenue            27  %          26  %          27  %
APAC                                2,537          2,014          1,690             26  %
Percentage of total revenue            16  %          16  %          15  %
Total revenue                    $ 15,785       $ 12,868       $ 11,171             23  %


Overall revenue during fiscal 2021 increased in all geographic regions as
compared to fiscal 2020 primarily due to increases in Digital Media revenue and,
to a lesser extent, increases in 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.
Included in the overall change in revenue for fiscal 2021 as compared to fiscal
2020 were impacts associated with foreign currency which were mitigated in part
by our foreign currency hedging program. During fiscal 2021, the U.S. Dollar
primarily weakened against EMEA currencies and the Australian Dollar as compared
to fiscal 2020, which increased revenue in U.S. Dollar equivalents by $276
million. During fiscal 2021, the foreign currency impacts to revenue were offset
in part by net hedging losses from our cash flow hedging program of $18 million.
  See Note 2 of our Notes to Consolidated Financial Statements for additional
details of revenue by geography.
Cost of Revenue
                                                                            % Change
(dollars in millions)               2021          2020          2019        2021-2020
Subscription                     $ 1,374       $ 1,108       $   926             24  %
Percentage of total revenue            9  %          9  %          8  %
Product                               41            36            40             14  %
Percentage of total revenue               *             *             *
Services and other                   450           578           707            (22) %
Percentage of total revenue            3  %          4  %          6  %
Total cost of revenue            $ 1,865       $ 1,722       $ 1,673              8  %

_________________________________________

(*)  Percentage is less than 1%
Subscription
Cost of subscription revenue consists of third-party hosting services and data
center costs, including expenses related to operating our network
infrastructure. Cost of subscription revenue also includes compensation costs
associated with network operations, implementation, account management and
technical support personnel, royalty fees, software costs and amortization of
certain intangible assets.
Cost of subscription revenue increased due to the following:
                                                                     Components of
                                                                       % Change
                                                                       2021-2020
 Hosting services and data center costs                                     

12 %

Base compensation and related benefits associated with headcount

5

 Incentive compensation, cash and stock-based                                  4
 Royalty costs                                                                 3

 Total change                                                                 24  %


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Product

Cost of product revenue is primarily comprised of third-party royalties,
amortization of certain intangible assets, localization costs and the costs
associated with the manufacturing of our products.
Services and Other
Cost of services and other revenue is primarily comprised of compensation and
contracted costs incurred to provide consulting services, training and product
support, and hosting services and data center costs. Cost of services and other
also includes media costs related to impressions purchased from third-party ad
inventory sources for our transaction-based Adobe Advertising Cloud offerings.
Cost of services and other decreased during fiscal 2021 as compared to fiscal
2020 mainly due to lower media costs related to Advertising Cloud offerings that
were discontinued beginning in the second quarter of fiscal 2020.
Operating Expenses
                                                                            % Change
(dollars in millions)               2021          2020          2019        2021-2020
Research and development         $ 2,540       $ 2,188       $ 1,930             16  %
Percentage of total revenue           16  %         17  %         17  %
Sales and marketing                4,321         3,591         3,244             20  %
Percentage of total revenue           27  %         28  %         29  %
General and administrative         1,085           968           881             12  %
Percentage of total revenue            7  %          8  %          8  %

Amortization of intangibles          172           162           175              6  %
Percentage of total revenue            1  %          1  %          2  %
Total operating expenses         $ 8,118       $ 6,909       $ 6,230             17  %


Research and Development
Research and development expenses consist primarily of compensation and
contracted costs associated with software development, third-party hosting
services and data center costs, related facilities costs and expenses associated
with computer equipment and software used in development activities.
Research and development expenses increased due to the following:
                                                                    Components of
                                                                      % Change
                                                                      2021-2020
Incentive compensation, cash and stock-based                                  8  %
Base compensation and related benefits associated with headcount            

6

Professional and consulting fees                                              2

Total change                                                                 16  %


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 compensation costs,
amortization of contract acquisition 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 and events, public relations and other market development programs.
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Sales and marketing expenses increased due to the following:

                                                                                         Components of
                                                                                            % Change
                                                                                           2021-2020

Marketing spend related to campaigns, events and overall marketing efforts

                            10  %
Incentive compensation, cash and stock-based                                                            5
Base compensation and related benefits associated with headcount                                        3
Transaction fees                                                                                        2

Total change                                                                                           20  %


General and Administrative
General and administrative expenses consist primarily of compensation and
contracted costs, 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 due to the following:
                                                                    Components of
                                                                      % Change
                                                                      2021-2020
Incentive compensation, cash and stock-based                                

9 %

Base compensation and related benefits associated with headcount              4
Bad debt expense                                                             (4)

Software licenses                                                             2
Various individually insignificant items                                      1
Total change                                                                 12  %


Amortization of Intangibles
Amortization expense increased during fiscal 2021 as compared to fiscal 2020
primarily due to amortization expense associated with intangible assets
purchased through our acquisition of Workfront. The increase in amortization
expense is offset in part by the impact of certain intangible assets from
previous acquisitions, including Marketo and Omniture, becoming fully amortized
in fiscal 2020.
Non-Operating Income (Expense), Net
                                                                                        % Change
(dollars in millions)                             2021         2020         2019        2021-2020
Interest expense                                $ (113)      $ (116)      $ (157)            (3) %
Percentage of total revenue                         (1) %        (1) %        (1) %
Investment gains (losses), net                      16           13           52             23  %
Percentage of total revenue                             *            *            *
Other income (expense), net                          -           42           42                **
Percentage of total revenue                             *            *            *

Total non-operating income (expense), net $ (97) $ (61) $

  (63)            59  %


_________________________________________

(*)  Percentage is less than 1%.
(**)  Percentage is not meaningful.

Interest Expense
Interest expense represents interest associated with our debt instruments.
Interest on our senior notes is payable semi-annually, in arrears, on February 1
and August 1.
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Interest expense decreased during fiscal 2021 as compared to fiscal 2020
primarily due to lower average interest rates on our debt instruments that were
refinanced in the first quarter of fiscal 2020.   See Note 17 of our Notes to
Consolidated Financial Statements for further details regarding our debt
instruments.
Investment Gains (Losses), Net
Investment gains (losses), net consists principally of unrealized holding gains
and losses associated with our deferred compensation plan assets, and gains and
losses associated with our direct and indirect investments in privately held
companies.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest earned on cash, cash
equivalents and short-term fixed income investments. Other income (expense), net
also includes realized gains and losses on fixed income investments and foreign
exchange gains and losses.
Other income (expense), decreased during fiscal 2021 primarily due to decreases
in interest income driven by lower average interest rates and increases in
foreign exchange losses.
Provision for (Benefit from) Income Taxes
                                                                                        % Change
 (dollars in millions)                            2021         2020          2019       2021-2020
Provision for (benefit from) income taxes       $ 883       $ (1,084)      $ 254                **
Percentage of total revenue                         6  %          (8) %        2  %
Effective tax rate                                 15  %         (26) %        8  %

_________________________________________

(**)  Percentage is not meaningful.
Our effective tax rate increased by approximately 41 percentage points during
fiscal 2021 as compared to fiscal 2020. The higher effective tax rate was
primarily due to the non-recurring tax benefits recognized during fiscal 2020 as
a result of the change in our corporate tax trading structure, and the
corresponding change in geographic mix of international income in fiscal 2021.
Our effective tax rate for fiscal 2021 was lower than the U.S. federal statutory
tax rate of 21% primarily due to tax benefits related to stock-based
compensation.
During fiscal 2020, we completed intra-entity transfers of certain IP rights to
our Irish subsidiary in order to better align the ownership of these rights with
how our business operates. The transfers did not result in taxable gains;
however, our Irish subsidiary recognized deferred tax assets for the book and
tax basis difference of the transferred IP rights. As a result of these
transactions, we recorded deferred tax assets, net of valuation allowance, and
related tax benefits totaling $1.35 billion, based on the fair value of the IP
rights transferred. The tax-deductible amortization related to the transferred
IP rights is recognized over the period of economic benefit.
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 to reduce our deferred tax assets to the
amount realizable. The total valuation allowance was $335 million as of
December 3, 2021, primarily attributable to certain state credits and foreign
intangible assets.
We are a United States-based multinational company subject to tax in multiple
U.S. and foreign tax jurisdictions. The current U.S. tax law subjects the
earnings of certain foreign subsidiaries to U.S. tax and generally allows an
exemption from taxation for distributions from foreign subsidiaries.
In the current global tax policy environment, the U.S. Treasury and other
domestic and foreign governing bodies continue to consider, and in some cases
introduce, changes in regulations applicable to corporate multinationals such as
Adobe. As regulations are issued, we account for finalized regulations in the
period of enactment.

See Note 10 of our Notes to Consolidated Financial Statements for further
informatio n regarding o ur provision for (benefit from) income
taxes.

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Accounting for Uncertainty in Income Taxes
The gross liabilities for unrecognized tax benefits excluding interest and
penalties were $289 million, $201 million and $173 million for fiscal 2021, 2020
and 2019, respectively. If the total unrecognized tax benefits at December 3,
2021, November 27, 2020 and November 29, 2019 were recognized, $199 million,
$136 million and $116 million would decrease the respective effective tax rates.
The combined amounts of accrued interest and penalties related to tax positions
taken on our tax returns were approximately $22 million and $26 million for
fiscal 2021 and 2020, 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 our tax 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 $5 million over the next 12
months.
In addition, in the United States and other countries where we conduct business
and in jurisdictions in which we are subject to tax, including those covered by
governing bodies that enact tax laws applicable to us, such as the European
Commission of the European Union, 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, other governmental bodies and intergovernmental economic
organizations such as the Organization for Economic Cooperation and Development,
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 such
jurisdictions. In the current global tax policy environment, any changes in
laws, regulations and interpretations related to these assertions could
adversely affect our effective tax rates, cause us to respond by making changes
to our business structure, or result in other costs to us which could adversely
affect our operations and financial results.
Moreover, we are subject to the 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 research and development tax
credits, intercompany transfer pricing practices and 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 potential
adjustments that may result from these examinations. We cannot provide assurance
that the final determination of any of these examinations will not have an
adverse effect on our operating results and financial position.
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                        LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
This data should be read in conjunction with our Consolidated Statements of Cash
Flows.
                                                As of
(in millions)                  December 3, 2021      November 27, 2020
Cash and cash equivalents     $          3,844      $            4,478
Short-term investments        $          1,954      $            1,514
Working capital               $          1,737      $            2,634
Stockholders' equity          $         14,797      $           13,264

A summary of our cash flows for fiscal 2021, 2020 and 2019 is as follows:
(in millions)

                                              2021              2020              2019
Net cash provided by operating activities               $  7,230          $  5,727          $  4,422
Net cash used for investing activities                    (3,537)             (414)             (456)
Net cash used for financing activities                    (4,301)           (3,488)           (2,946)

Effect of foreign currency exchange rates on cash and
cash equivalents

                                             (26)                3               (13)

Net increase (decrease) in cash and cash equivalents $ (634) $

1,828 $ 1,007


Our primary source of cash is receipts from revenue. Our 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 sources of cash include proceeds from participation in the
employee stock purchase plan. Other uses of cash include business acquisitions,
purchases of property and equipment and payments for taxes related to net share
settlement of equity awards.
Cash Flows from Operating Activities
For fiscal 2021, net cash provided by operating activities of $7.23 billion was
primarily comprised of net income adjusted for the net effect of non-cash items.
The primary working capital sources of cash were net income together with
increases in deferred revenue driven by Digital Media and Digital Experience
offerings. The primary working capital use of cash were increases in prepaid
expenses and other assets together with increases in trade receivables. The
increases in prepaid expenses and other assets were driven by sales commissions
paid and capitalized and the timing of billings and payments associated with
certain vendors. The increases in trade receivables were attributable to the
timing of billings.
Cash Flows from Investing Activities
For fiscal 2021, net cash used for investing activities of $3.54 billion was
primarily due to our acquisition of Workfront, Frame.io and ongoing capital
expenditures.   See Note 3 of our Notes to Consolidated Financial Statements for
further information regarding these acquisitions.
Cash Flows from Financing Activities
For fiscal 2021, net cash used for financing activities of $4.30 billion was
primarily due to payments for our common stock repurchases and taxes paid
related to the net share settlement of equity awards, which were offset by
proceeds from re-issuance of common stock mainly for our employee stock purchase
plan. See the section titled "Stock Repurchase Program" below.
Liquidity and Capital Resources Considerations
Our existing cash, cash equivalents and investment balances may fluctuate during
fiscal 2022 due to changes in our planned cash outlay.
Cash from operations could also be affected by various risks and uncertainties,
including, but not limited to, the effects of the pandemic and other risks
detailed in the section titled "Risk Factors" in Part I, Item 1A of this report.
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, operating resource expenditure and capital expenditure
requirements for the next twelve months.
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Our cash equivalent and short-term investment portfolio as of December 3, 2021
consisted of asset-backed securities, corporate debt securities, money market
funds, municipal securities, time deposits and U.S. Treasury securities. We use
professional investment management firms to manage a large portion of our
invested cash.
We expect to continue our investing activities, including short-term and
long-term investments, purchases of computer systems for research and
development, sales and marketing, product support and administrative staff, and
facilities expansion. As of December 3, 2021, we expect our capital investment
to be approximately $180 million to $220 million, primarily to fund our San Jose
and Bangalore construction projects during fiscal 2022. 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.
Revolving Credit Agreement
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 December 3, 2021,
there were no outstanding borrowings under this credit agreement and the entire
$1 billion credit line remains available for borrowing. Our Revolving Credit
Agreement contains a financial covenant requiring us not to exceed a maximum
leverage ratio. As of December 3, 2021, 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. Under
the terms of our 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.
Senior Notes
We have $4.15 billion senior notes outstanding, which rank equally with our
other unsecured and unsubordinated indebtedness. As of December 3, 2021, the
carrying value of our senior notes was $4.12 billion and our maximum commitment
for interest payments was $514 million for the remaining duration of our
outstanding senior notes. Interest is payable semi-annually, in arrears on
February 1 and August 1. Our senior notes do not contain any financial
covenants.   See Note 17 of our Notes to Consolidated Financial Statements for
further details regarding our debt.
Contractual Obligations
Our purchase obligations consist of agreements to purchase goods and services
entered into in the ordinary course of business. As of December 3, 2021, the
value of our non-cancellable unconditional purchase obligations was $1.38
billion.   See N    ote 16 of ou    r     Notes to Consolidated Financial
Statements     for additional information re    garding our pur    chase
obligations.
We lease certain facilities and data centers under non-cancellable operating
lease arrangements that expire at various dates through 2031. As of December 3,
2021, the value of our obligations under operating leases was $604 million.
  See Note 1    8     of our Notes to Consolidated Financial Statements for
additional information regarding ou    r     lease     obligations.
Our transition tax liability related to historical undistributed foreign
earnings, which was accrued as a result of the U.S. Tax Act, was approximately
$349 million as of December 3, 2021 and is payable in installments through
fiscal 2026. As we repatriate foreign earnings for use in the United States, the
distributions will generally be exempt from federal income taxes under current
U.S. tax law.
Stock Repurchase Program
To facilitate our stock repurchase program, designed to return value to our
stockholders and minimize dilution from stock issuances, we may repurchase our
shares in the open market or enter into structured repurchase agreements with
third parties. In May 2018, our Board of Directors granted authority to
repurchase up to $8 billion in our common stock, which we fully utilized during
fiscal 2021. In December 2020, our Board of Directors granted additional
authority to repurchase up to $15 billion in our common stock through the end of
fiscal 2024.
During fiscal 2021, 2020 and 2019, we entered into several structured stock
repurchase agreements with large financial institutions, whereupon we provided
them with prepayments totaling $3.95 billion, $3.05 billion and $2.75 billion,
respectively. We repurchased approximately 7.2 million shares at an average
price of $536.17 per share in fiscal 2021, 8.0 million shares at an average
price of $376.38 per share in fiscal 2020, and 9.9 million shares at an average
price of $270.23 per share in fiscal 2019.
Subsequent to December 3, 2021, as part of the December 2020 stock repurchase
authority, we entered into an accelerated share repurchase agreement with a
large financial institution whereupon we provided them with a prepayment of $2.4
billion and received an initial delivery of 3.2 million shares, which represents
approximately 75% of our prepayment. The
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remaining balance will be settled during our third quarter of fiscal 2022. Upon
completion of the $2.4 billion accelerated share repurchase agreement, $10.7
billion remains under our December 2020 authority.
  See section titled "Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities" in Part I, Item 5 of this
report for stock repurchases during the quarter ended   December 3, 2021   and
Note 14 of our Notes to Consolidated Financial S    tatements for
    fu    rther details regarding our stock repurchase program    .
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.

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