Table of Contents

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, fluctuations in foreign currency exchange rates, strategic investments, industry positioning, customer acquisition and retention, the amount of annualized 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 titled "Risk Factors" in Part II, Item 1A of this report. The risks described herein and in other documents we file from time to time with the U.S. Securities and Exchange Commission (the "SEC"), including our Annual Report on Form 10-K for fiscal 2023, should be carefully reviewed. Undue reliance should not be placed 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

Adobe is a global technology company with a mission to change the world through personalized digital experiences. For over four decades, Adobe's innovations have transformed how individuals, teams, businesses, enterprises, institutions, and governments engage and interact across all types of media. Our products, services and solutions are used around the world to imagine, create, manage, deliver, measure, optimize and engage with content across surfaces and fuel digital experiences. We have a diverse user base that includes consumers, communicators, creative professionals, developers, students, small and medium businesses and enterprises. We are also empowering creators by putting the power of artificial intelligence ("AI") in their hands, and doing so in ways we believe are responsible. Our products and services help unleash creativity, accelerate document productivity and power businesses in a digital world. We have operations in the Americas; Europe, Middle East and Africa ("EMEA"); and Asia-Pacific ("APAC").

OPERATIONS OVERVIEW

For our third quarter of fiscal 2024, we experienced strong demand across our Digital Media and Digital Experience offerings, driven by our innovative product roadmap. As we execute on our long-term growth initiatives, with focus on delivering product innovation and driving adoption and usage of our AI-powered solutions, we have continued to experience growth in software-based subscription revenue across our portfolio of offerings.

Digital Media

In our Digital Media segment, we are a market leader with Creative Cloud, our subscription-based offering which provides desktop tools, mobile applications ("apps") and cloud-based services for designing, creating and publishing rich content and immersive 3D experiences. Creative Cloud offers Adobe Acrobat Pro, our comprehensive PDF solution, integral to creative workflows and used by creators worldwide as part of our Creative Cloud All Apps subscription and on a standalone basis. In addition, Adobe Express is our web and mobile app designed to enable a broad spectrum of users, including novice content creators, communicators and creative professionals, to create, edit and customize content quickly and easily with content-first, task-based solutions. Creative Cloud also includes Adobe Firefly, a group of creative generative AI models designed to generate high quality images and text effects. Adobe Firefly-powered generative AI features are also available across Creative Cloud apps including Adobe Photoshop and Adobe Express. 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' devices, 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 like Adobe Express and Adobe Firefly that make creative tools accessible to first-time creators and communicators, and delivering new features and technologies to existing customers with our latest releases such as generative AI capabilities. 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 existing users, continue to attract 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 and enhanced desktop, web and mobile apps, 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.

We are also a market leader with our Document Cloud offerings built around our Adobe Acrobat family of products, with a set of integrated mobile apps and cloud-based document services which enable users to create, collaborate, review, approve, sign and track documents regardless of platform or application source type. Document Cloud, which enhances the way people manage critical documents at home, in the office and across devices, includes subscriptions to Adobe Acrobat Pro and Standard, Adobe Acrobat Sign and Adobe Scan. Certain Adobe Acrobat products are also offered as perpetual licenses. In April 2024, we introduced Acrobat AI Assistant, a generative AI-powered product designed to deliver insights and enhance productivity through interactive document experiences, which is available as an add-on subscription to our Adobe Acrobat Pro and Standard and Adobe Acrobat Reader products.

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, which continue to contribute strong product-led growth in the business.

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 current fiscal year are based on currency rates set at the beginning of the year and held constant throughout the year for measurement purposes. We calculate ARR as follows:

Creative ARRAnnual Value of Creative Cloud Subscriptions and Services+ Annual Creative ETLA Contract Value

Document Cloud ARRAnnual Value of Document Cloud Subscriptions and Services +Annual Document Cloud ETLA Contract Value

Digital Media ARRCreative ARR+ Document Cloud ARR

Creative ARR exiting the third quarter of fiscal 2024 was $13.45 billion, up from $12.49 billion at the end of fiscal 2023. Document Cloud ARR exiting the third quarter of fiscal 2024 was $3.31 billion, up from $2.84 billion at the end of fiscal 2023. Total Digital Media ARR grew to $16.76 billion at the end of the third quarter of fiscal 2024, up from $15.33 billion at the end of fiscal 2023.

Our success in driving growth in ARR has positively affected our revenue growth. Creative revenue in the third quarter of fiscal 2024 was $3.19 billion, up from $2.91 billion in the third quarter of fiscal 2023, representing 10% year-over-year growth. Document Cloud revenue in the third quarter of fiscal 2024 was $807 million, up from $685 million in the third quarter of fiscal 2023, representing 18% year-over-year growth. Total Digital Media segment revenue grew to $4.00 billion in the third quarter of fiscal 2024, up from $3.59 billion in the third quarter of fiscal 2023, representing 11% year-over-year growth driven by strong net new user growth.

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Digital Experience

We are a market leader in the fast-growing category addressed by our Digital Experience segment. The Adobe Experience Cloud apps and services are designed to manage customer journeys, enable personalized experiences at scale and deliver intelligence for businesses of any size in any industry. Our differentiation and competitive advantage are strengthened by our ability to use the Adobe Experience Platform to integrate our comprehensive set of solutions and our ability to embed AI into our product portfolio, such as with our new Adobe Experience Platform AI Assistant, a generative AI-powered conversational interface designed to help customers automate workflows and generate new audiences and journeys.

Adobe Experience Cloud delivers solutions for our customers across the following strategic growth pillars:

•Data insights and audiences. Our products, including Adobe Analytics, Customer Journey Analytics, Adobe Product Analytics, Adobe Mix Modeler, and our Real-time Customer Data Platform, deliver actionable data in real time to provide highly tailored and adaptive experiences across platforms.

•Content, commerce and workflows. Our products help customers manage, deliver, monetize, and optimize content delivery through Adobe Experience Manager; build multi-channel commerce experiences for B2B and B2C customers on a single platform with Adobe Commerce; and strategically plan, manage, collaborate, and execute on workflows for marketing campaigns and other projects at speed and scale with our enterprise work management app, Adobe Workfront.

•Customer journeys. Our products help businesses manage, test, target and personalize customer journeys delivered as campaigns across B2B and B2C use cases, including through Adobe Marketo Engage, Adobe Campaign, Adobe Target and Adobe Journey Optimizer.

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 integrate 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, such as with our new Adobe GenStudio solution, 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 and our experience-led growth strategy.

Digital Experience revenue was $1.35 billion in the third quarter of fiscal 2024, up from $1.23 billion in the third quarter of fiscal 2023, representing 10% year-over-year growth. Driving this growth was the increase in subscription revenue, which grew to $1.23 billion in the third quarter of fiscal 2024 from $1.10 billion in the third quarter of fiscal 2023, representing 12% year-over-year growth.

Macroeconomic Conditions

As a corporation with an extensive global footprint, we are subject to risks and exposures from the evolving macroeconomic environment, including the effects of increased global inflationary pressures and interest rates, fluctuations in foreign currency exchange rates, potential economic slowdowns or recessions and geopolitical pressures, including the unknown impacts of current and future trade regulations. We continuously monitor the direct and indirect impacts of these circumstances on our business and financial results.

While our revenue and earnings are relatively predictable as a result of our subscription-based business model, the broader implications of these macroeconomic events on our business, results of operations and overall financial position, particularly in the long term, remain uncertain. See Risk Factors for further discussion of the possible impact of these macroeconomic issues on our business.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States ("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 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.

There have been no significant changes in our critical accounting policies and estimates during the nine months ended August 30, 2024, 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 December 1, 2023.

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

Financial Performance Summary

•Total Digital Media ARR of approximately $16.76 billion as of August 30, 2024 increased by $1.42 billion, or 9%, from $15.33 billion as of December 1, 2023.

•Creative revenue during the three months ended August 30, 2024 of $3.19 billion increased by $279 million, or 10%, compared to the year-ago period. Document Cloud revenue during the three months ended August 30, 2024 of $807 million increased by $122 million, or 18%, compared to the year-ago period.

•Digital Experience revenue of $1.35 billion during the three months ended August 30, 2024 increased by $125 million, or 10%, compared to the year-ago period.

•Cost of revenue of $554 million during the three months ended August 30, 2024 decreased by $26 million, or 4%, compared to the year-ago period.

•Operating expenses of $2.86 billion during the three months ended August 30, 2024 increased by $249 million, or 10%, compared to the year-ago period.

•Net income of $1.68 billion during the three months ended August 30, 2024 increased by $281 million, or 20%, compared to the year-ago period.

•Cash flows from operations of $5.14 billion during the nine months ended August 30, 2024 decreased by $570 million, or 10%, compared to the year-ago period and were adversely impacted by the payment of the $1 billion Figma termination fee during the first quarter of fiscal 2024.

•Remaining performance obligations of $18.14 billion as of August 30, 2024 increased by $924 million, or 5%, from $17.22 billion as of December 1, 2023.

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Revenue for the Three and Nine Months Ended August 30, 2024 and September 1, 2023

(dollars in millions)Three MonthsNine Months

20242023% Change20242023% Change

Subscription$5,180 $4,631 12 %$15,156 $13,521 12 %

Percentage of total revenue96 %95 % 95 %94 %

Product82 96 (15)%305 346 (12)%

Percentage of total revenue1 %2 % 2 %2 %

Services and other146 163 (10)%438 494 (11)%

Percentage of total revenue3 %3 % 3 %4 %

Total revenue$5,408 $4,890 11 %$15,899 $14,361 11 %

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 the three and nine months ended August 30, 2024 and September 1, 2023 is as follows:

(dollars in millions)Three MonthsNine Months

20242023% Change20242023% Change

Digital Media$3,921 $3,506 12 %$11,474 $10,225 12 %

Digital Experience1,231 1,096 12 %3,599 3,208 12 %

Publishing and Advertising28 29 (3)%83 88 (6)%

Total subscription revenue$5,180 $4,631 12 %$15,156 $13,521 12 %

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 original equipment manufacturer 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 or 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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Segment Information

(dollars in millions)Three MonthsNine Months

20242023% Change20242023% Change

Digital Media$3,995 $3,594 11 %$11,719 $10,500 12 %

Percentage of total revenue74 %74 % 74 %73 %

Digital Experience1,354 1,229 10 %3,970 3,627 9 %

Percentage of total revenue25 %25 % 25 %25 %

Publishing and Advertising59 67 (12)%210 234 (10)%

Percentage of total revenue1 %1 % 1 %2 %

Total revenue$5,408 $4,890 11 %$15,899 $14,361 11 %

Digital Media

Revenue by major offerings in our Digital Media reportable segment for the three and nine months ended August 30, 2024 and September 1, 2023 were as follows:

(dollars in millions)Three MonthsNine Months

20242023% Change20242023% Change

Creative Cloud$3,188 $2,909 10 %$9,380 $8,522 10 %

Document Cloud807 685 18 %2,339 1,978 18 %

Total Digital Media revenue$3,995 $3,594 11 %$11,719 $10,500 12 %

Revenue from Digital Media increased $401 million and $1.22 billion during the three and nine months ended August 30, 2024 as compared to the three and nine months ended September 1, 2023 driven by increases in revenue associated with our Creative and Document Cloud subscription offerings due to continued demand amid an increasingly digital environment, strong engagement across customer segments and migrating our customers to higher valued subscription offerings with increased revenue per subscription.

Digital Experience

Revenue from Digital Experience increased $125 million and $343 million during the three and nine months ended August 30, 2024 as compared to the three and nine months ended September 1, 2023 driven by subscription revenue growth across our offerings.

Geographical Information

(dollars in millions)Three MonthsNine Months

20242023% Change20242023% Change

Americas$3,241 $2,943 10 %$9,539 $8,601 11 %

Percentage of total revenue60 %60 % 60 %60 %

EMEA1,405 1,229 14 %4,085 3,615 13 %

Percentage of total revenue26 %25 % 26 %25 %

APAC762 718 6 %2,275 2,145 6 %

Percentage of total revenue14 %15 % 14 %15 %

Total revenue$5,408 $4,890 11 %$15,899 $14,361 11 %

Overall revenue during the three and nine months ended August 30, 2024 increased in all geographic regions as compared to the three and nine months ended September 1, 2023. 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 nine months ended August 30, 2024 as compared to the three and nine months ended September 1, 2023 were impacts associated with foreign currency and our foreign currency hedging program. During the three and nine months ended August 30, 2024, the U.S. Dollar primarily strengthened against APAC foreign currencies and weakened against EMEA foreign currencies as compared to the year-ago periods, which resulted in a net decrease in revenue in U.S. Dollar equivalents of approximately $33 million and $49 million, respectively. For the three and nine months ended August 30, 2024, we had net hedging losses from our cash flow hedging program of $2 million and $11 million, respectively.

Cost of Revenue for the Three and Nine Months Ended August 30, 2024 and September 1, 2023

(dollars in millions)Three MonthsNine Months

20242023% Change20242023% Change

Subscription$413 $447 (8)%$1,324 $1,317 1 %

Percentage of total revenue8 %9 %8 %9 %

Product6 7 (14)%19 23 (17)%

Percentage of total revenue** **

Services and other135 126 7 %399 380 5 %

Percentage of total revenue2 %3 % 3 %3 %

Total cost of revenue$554 $580 (4)%$1,742 $1,720 1 %

(*) 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 decreased during the three months ended August 30, 2024 as compared to the three months ended September 1, 2023 and increased during the nine months ended August 30, 2024 as compared to the nine months ended September 1, 2023 primarily due to the following:

Components of

% Change

2024-2023

QTD

Components of

% Change

2024-2023

YTD

Loss contingency reversal

(10)%(3)%

Amortization of intangibles(2)(2)

Hosting services and data center costs2 4

Base compensation and related benefits

2 1

Various individually insignificant items

• 1

Total change(8)%1 %

Cost of subscription revenue during the three and nine months ended August 30, 2024 included the reversal of a loss contingency associated with an IP litigation matter.

Product

Cost of product revenue is primarily comprised of third-party royalties, localization costs and 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 revenue increased during the three and nine months ended August 30, 2024 as compared to the three and nine months ended September 1, 2023 primarily due to increases in compensation costs and professional fees.

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Operating Expenses for the Three and Nine Months Ended August 30, 2024 and September 1, 2023

(dollars in millions)

Three MonthsNine Months

20242023 % Change20242023 % Change

Research and development$1,022 $881 16 %$2,945 $2,584 14 %

Percentage of total revenue19 %18 %19 %18 %

Sales and marketing1,431 1,337 7 %4,228 3,983 6 %

Percentage of total revenue26 %27 %27 %28 %

General and administrative366 353 4 %1,073 1,041 3 %

Percentage of total revenue7 %7 %7 %7 %

Acquisition termination fee

• • • %1,000 - **

Percentage of total revenue*6 %

Amortization of intangibles

43 42 2 %127 126 1 %

Percentage of total revenue1 %1 %1 %1 %

Total operating expenses$2,862 $2,613 10 %$9,373 $7,734 21 %

(*) Percentage is less than 1%.

(**) Percentage is not meaningful.

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 during the three and nine months ended August 30, 2024 as compared to the three and nine months ended September 1, 2023 due to the following:

Components of

% Change

2024-2023

QTD

Components of

% Change

2024-2023

YTD

Base compensation and related benefits6 %5 %

Incentive compensation, cash and stock-based3 3

Hosting services and data center costs

5 4

Various individually insignificant items2 2

Total change16 %14 %

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, apps 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.

Sales and marketing expenses increased during the three and nine months ended August 30, 2024 as compared to the three and nine months ended September 1, 2023 primarily due to increases in compensation costs.

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

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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 nine months ended August 30, 2024 as compared to the three and nine months ended September 1, 2023 primarily due to the following:

Components of

% Change

2024-2023

QTD

Components of

% Change

2024-2023

YTD

Base compensation and related benefits4 %3 %

Incentive compensation, cash and stock-based2 3

Charitable contributions3 -

Professional and consulting fees(6)(5)

Various individually insignificant items1 2

Total change4 %3 %

Acquisition Termination Fee

During the nine months ended August 30, 2024, we incurred a $1 billion termination fee which resulted from termination of the Figma transaction.

Non-Operating Income (Expense), Net for the Three and Nine Months Ended August 30, 2024 and September 1, 2023

(dollars in millions)Three MonthsNine Months

20242023% Change20242023% Change

Interest expense$(51)$(27)89 %$(119)$(85)40 %

Percentage of total revenue(1)%(1)%(1)%(1)%

Investment gains (losses), net12 6 **34 12 **

Percentage of total revenue****

Other income (expense), net

89 67 **241 157 **

Percentage of total revenue2 %1 %2 %1 %

Total non-operating income (expense), net

$50 $46 **$156 $84 **

(*) 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.

Interest expense increased during the three and nine months ended August 30, 2024 as compared to the three and nine months ended September 1, 2023 due to the senior notes issued in April 2024. See Note 14 for further details regarding our debt.

Investment Gains (Losses), Net

Investment gains (losses), net consists principally of unrealized holding gains and losses associated with our deferred compensation plan assets.

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), net increased during the three and nine months ended August 30, 2024 as compared to the three and nine months ended September 1, 2023 primarily due to increases in interest income driven by higher average cash equivalent balances and average interest rates.

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Provision for Income Taxes for the Three and Nine Months Ended August 30, 2024 and September 1, 2023

(dollars in millions)Three MonthsNine Months

20242023% Change20242023% Change

Provision for income taxes$358 $340 5 %$1,063 $1,046 2 %

Percentage of total revenue7 %7 %7 %7 %

Effective tax rate18 %20 %22 %21 %

Our effective tax rate decreased by approximately two percentage points and increased by approximately one percentage point for the three and nine months ended August 30, 2024, respectively, as compared to the three and nine months ended September 1, 2023. During the three and nine months ended August 30, 2024, there was an increase in the net tax benefits from effects of non-U.S. operations and stock-based compensation which decreased our effective tax rates. The increase in our effective tax rate during the nine months ended August 30, 2024 was primarily due to the Figma acquisition termination fee which was not deductible for financial statement purposes, partially offset by the previously noted items.

Our effective tax rate for the three months ended August 30, 2024 was lower than the U.S. federal statutory tax rate of 21% primarily due to the net tax benefits from effects of non-U.S. operations and the U.S. federal research tax credit, partially offset by state taxes. Our effective tax rate for the nine months ended August 30, 2024 was higher than the U.S. federal statutory tax rate of 21% primarily due to the Figma acquisition termination fee which was not deductible for financial statement purposes, partially offset by the previously noted items.

We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized based on evaluation of all available positive and negative evidence. 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 $723 million as of August 30, 2024, primarily related to certain state credits and capital loss carryforwards.

We are a U.S.-based multinational company subject to tax in multiple domestic 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 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.

The provision from the U.S. Tax Act which requires us to capitalize and amortize research and development costs became effective in fiscal 2023. This requirement continues to have an adverse impact on our effective rates for income taxes paid, which is partially offset by a benefit to our effective tax rates from the increase in the foreign-derived intangible income deduction.

Accounting for Uncertainty in Income Taxes

The gross liabilities for unrecognized tax benefits excluding interest and penalties were $703 million and $436 million as of August 30, 2024 and September 1, 2023, respectively. If the total unrecognized tax benefits as of August 30, 2024 and September 1, 2023 were recognized, $539 million and $307 million would decrease the respective effective tax rates.

As of August 30, 2024 and September 1, 2023, the combined amounts of accrued interest and penalties included in long-term income taxes payable related to tax positions taken on our tax returns were not material.

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. Although the timing of resolution, settlement and closing of audits is not certain, it is reasonably possible that the underlying unrecognized tax benefits may decrease by up to $50 million over the next 12 months.

Our future effective tax rates may be materially affected by changes in the tax rates in jurisdictions where our income is earned, changes in jurisdictions in which our profits are determined to be earned and taxed, changes in the valuation of our deferred tax assets and liabilities, changes in or interpretation of tax rules and regulations in the jurisdictions in which we do business, or unexpected changes in business and market conditions that could reduce certain tax benefits.

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In addition, tax laws in the United States as well as other countries and jurisdictions in which we conduct business are subject to change as new laws are passed and/or new interpretations are made available. These countries, governmental bodies, such as the European Commission of the European Union, and intergovernmental economic organizations, such as the Organization for Economic Cooperation and Development, have made or could make unprecedented assertions about how taxation is determined and, in some cases, have proposed or enacted new laws that are contrary to the way in which rules and regulations have historically been interpreted and applied. Changes in our operating landscape, such as changes in laws and/or interpretations of tax rules, could adversely affect our effective tax rates and/or cause us to respond by making changes to our business structure which could adversely affect our operations and financial results.

Moreover, we are subject to the examination of our income tax returns by domestic and foreign tax authorities. 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. Our policy is to record interest and penalties related to unrecognized tax benefits in income tax expense. While we believe our tax estimates are reasonable, we cannot provide assurance that the final determination of any of these examinations will not have an adverse effect on our financial position and results of operations.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Our primary source of cash is receipts from revenue. Other customary sources of cash include proceeds from maturities and sales of short-term investments. Our primary uses of cash are general business expenses including payroll and related benefits costs, income taxes, marketing and third-party hosting services, as well as our stock repurchase program as described below. Other customary uses of cash include purchases of property and equipment and payments for taxes related to net share settlement of equity awards.

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

As of

(in millions)August 30, 2024December 1, 2023

Cash and cash equivalents$7,193 $7,141

Short-term investments$322 $701

Working capital$1,072 $2,833

Stockholders' equity$14,545 $16,518

A summary of our cash flows is as follows:

Nine Months Ended

(in millions)August 30, 2024September 1, 2023

Net cash provided by operating activities$5,135 $5,705

Net cash provided by investing activities130 623

Net cash used for financing activities(5,223)(3,965)

Effect of foreign currency exchange rates on cash and cash equivalents10 2

Net change in cash and cash equivalents$52 $2,365

Cash Flows from Operating Activities

Net cash provided by operating activities of $5.14 billion for the nine months ended August 30, 2024 was primarily comprised of net income adjusted for the net effect of non-cash items. Payment of the $1 billion Figma termination fee during the nine months ended August 30, 2024 had an adverse impact on net income and cash flows from operations. Working capital uses of cash included increases in prepaid expenses and other assets, offset by decreases in trade receivables driven by strong collections.

Cash Flows from Investing Activities

Net cash provided by investing activities of $130 million for the nine months ended August 30, 2024 was primarily due to maturities and sales of short-term investments partially offset by ongoing capital expenditures.

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Cash Flows from Financing Activities

Net cash used for financing activities of $5.22 billion for the nine months ended August 30, 2024 was primarily due to payments for our common stock repurchases and taxes paid related to the net share settlement of equity awards. These uses of cash were offset in part by proceeds from the issuance of senior notes and re-issuance of treasury stock related to our employee stock purchase plan. See the sections titled "Senior Notes" and "Stock Repurchase Program" below.

Liquidity and Capital Resources Considerations

Our existing cash, cash equivalents and investment balances may fluctuate during fiscal 2024 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, risks detailed in the section titled "Risk Factors" in titled Part II, 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 revolving credit facility will be sufficient to meet our working capital, operating resource expenditure and capital expenditure requirements for the next twelve months and for the foreseeable future.

Our cash equivalent and short-term investment portfolio as of August 30, 2024 consisted of money market funds, U.S. Treasury securities, corporate debt securities, U.S. agency securities and asset-backed 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 and server hardware to operate our network infrastructure, 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.

Revolving Credit Agreement

We have a $1.5 billion senior unsecured revolving credit agreement (the "Revolving Credit Agreement") with a syndicate of lenders, providing for loans to us and certain of our subsidiaries through June 30, 2027. Subject to the agreement of lenders, we may obtain up to an additional $500 million in commitments, for a maximum aggregate commitment of $2 billion. As of August 30, 2024, there were no outstanding borrowings under the Revolving Credit Agreement and the entire $1.5 billion credit line remains available for borrowing. 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.

Commercial Paper Program

We have a commercial paper program under which we may issue unsecured commercial paper up to a total of $3 billion outstanding at any time, with maturities of up to 397 days from the date of issue. The net proceeds from the issuance of commercial paper are expected to be used for general corporate purposes, which may include working capital, capital expenditures, acquisitions, stock repurchases, refinancing indebtedness or any other general corporate purposes. As of August 30, 2024, there were no outstanding borrowings under the commercial paper program.

Senior Notes

In April 2024, we issued $500 million of senior notes due April 4, 2027, $750 million of senior notes due April 4, 2029 and $750 million of senior notes due April 4, 2034. In total, we have $5.65 billion senior notes outstanding, which rank equally with our other unsecured and unsubordinated indebtedness. As of August 30, 2024, the carrying value of our senior notes was $5.63 billion and our maximum commitment for interest payments was $855 million for the remaining duration of our outstanding senior notes. Interest is payable semi-annually, in arrears. Our senior notes do not contain any financial covenants. See Note 14 of our notes to condensed consolidated financial statements for further details regarding our debt.

During the first quarter of fiscal 2024, we reclassified the senior notes due February 1, 2025 as current debt in our condensed consolidated balance sheets. As of August 30, 2024, the carrying value of our current debt was $1.50 billion, net of the related discount and issuance costs. Though we intend to refinance the current portion of our debt on or before the due date, the timing of the refinancing may be impacted by market conditions.

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Contractual Obligations

Our principal commitments as of August 30, 2024 consisted of purchase obligations resulting from agreements to purchase goods and services in the ordinary course of business and obligations under operating lease arrangements. During the first quarter of fiscal 2024, we executed agreements associated with certain of our long-term supplier commitments that increased our minimum purchase obligations by $2.3 billion through December 2028. There have been no other material changes in those obligations during the nine months ended August 30, 2024.

Stock Repurchase Program

To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we may repurchase our shares in the open market or enter into structured repurchase agreements with third parties. In December 2020, our Board of Directors granted authority to repurchase up to $15 billion in our common stock, which became fully utilized during the nine months ended August 30, 2024. In March 2024, our Board of Directors granted additional authority to repurchase up to $25 billion in our common stock through March 14, 2028.

During the nine months ended August 30, 2024, we entered into accelerated share repurchase agreements ("ASRs") with large financial institutions whereupon we provided them with prepayments totaling $7 billion.

During the nine months ended August 30, 2024, we repurchased a total of 12.9 million shares, including approximately 0.6 million shares at an average price of $626.68 through a structured repurchase agreement entered into during fiscal 2023, 3.5 million shares at an average price of $578.11 through an ASR entered into in December 2023, 5.2 million shares at an average price of $475.94 through an ASR entered into in March 2024, and 3.6 million shares from the initial delivery of an ASR entered into in June 2024. Subsequent to August 30, 2024, the ASR entered into in June 2024 was settled which resulted in total repurchases of 4.6 million shares at an average price of $546.30.

Subsequent to August 30, 2024, as part of the March 2024 stock repurchase authority, we entered into an ASR with a large financial institution whereupon we provided them with a prepayment of $2.5 billion and received an initial delivery of 3.6 million shares, which represents approximately 75% of our prepayment. Upon completion of this $2.5 billion ASR, $17.65 billion remains under our March 2024 stock repurchase authority.

See Note 11 of our notes to condensed consolidated financial statements for further 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.