Company Quick10K Filing
Quick10K
Adobe Systems
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$275.79 488 $134,570
10-Q 2019-03-01 Quarter: 2019-03-01
10-K 2018-11-30 Annual: 2018-11-30
10-Q 2018-08-31 Quarter: 2018-08-31
10-Q 2018-06-01 Quarter: 2018-06-01
10-Q 2018-03-02 Quarter: 2018-03-02
10-K 2017-12-01 Annual: 2017-12-01
10-Q 2017-09-01 Quarter: 2017-09-01
10-Q 2017-06-02 Quarter: 2017-06-02
10-Q 2017-03-03 Quarter: 2017-03-03
10-K 2016-12-02 Annual: 2016-12-02
10-Q 2016-09-02 Quarter: 2016-09-02
10-Q 2016-06-03 Quarter: 2016-06-03
10-Q 2016-03-04 Quarter: 2016-03-04
10-K 2015-11-27 Annual: 2015-11-27
10-Q 2015-08-28 Quarter: 2015-08-28
10-Q 2015-05-29 Quarter: 2015-05-29
10-Q 2015-02-27 Quarter: 2015-02-27
10-K 2014-11-28 Annual: 2014-11-28
10-Q 2014-08-29 Quarter: 2014-08-29
10-Q 2014-05-30 Quarter: 2014-05-30
10-Q 2014-02-28 Quarter: 2014-02-28
10-K 2013-11-29 Annual: 2013-11-29
8-K 2019-04-11 Officers, Shareholder Vote, Exhibits
8-K 2019-03-14 Earnings, Exhibits
8-K 2019-01-24 Officers, Exhibits
8-K 2019-01-24 Officers, Exhibits
8-K 2019-01-17 Officers, Exhibits
8-K 2019-01-17 Officers, Exhibits
8-K 2018-12-13 Earnings, Exhibits
8-K 2018-11-19 Officers
8-K 2018-10-31 M&A, Other Events, Exhibits
8-K 2018-10-17 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2018-10-08 Amend Bylaw, Exhibits
8-K 2018-09-21 Enter Agreement, Regulation FD, Exhibits
8-K 2018-09-13 Earnings, Exhibits
8-K 2018-06-14 Earnings, Exhibits
8-K 2018-05-15 Other Events, Exhibits
8-K 2018-04-12 Officers, Shareholder Vote, Exhibits
8-K 2018-04-04 Officers, Exhibits
8-K 2018-03-15 Earnings, Exhibits
8-K 2018-01-24 Officers, Exhibits
WBK Westpac Banking 64,930
IONS Ionis Pharmaceuticals 9,410
RIG Transocean 4,670
PRO Pros Holdings 1,980
PPDF Ppdai Group 1,580
HSTM Healthstream 855
IGI Imagistics 229
XSPA Xpresspa Group 5
NWBO Northwest Biotherapeutics 0
BREIT Blackstone Real Estate Income Trust 0
ADBE 2019-03-01
Part I-Financial Information
Item 1. Condensed Consolidated Financial Statements
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Note 2. Revenue
Note 3. Acquisitions
Note 4. Cash, Cash Equivalents and Short-Term Investments
Note 5. Fair Value Measurements
Note 6. Derivatives and Hedging Activities
Note 7. Goodwill and Purchased and Other Intangibles
Note 8. Accrued Expenses
Note 9. Stock-Based Compensation
Note 10. Accumulated Other Comprehensive Income (Loss)
Note 11. Stock Repurchase Program
Note 12. Net Income per Share
Note 13. Commitments and Contingencies
Note 14. Debt
Note 15. Non-Operating Income (Expense)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 adbeex311q119.htm
EX-31.2 adbeex312q119.htm
EX-32.1 adbeex321q119.htm
EX-32.2 adbeex322q119.htm

Adobe Systems Earnings 2019-03-01

ADBE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 1, 2019

 or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                   to                   
 
Commission File Number: 0-15175
 
Adobe Inc.
(Exact name of registrant as specified in its charter)
_________________________
Delaware
(State or other jurisdiction of
incorporation or organization)
77-0019522
(I.R.S. Employer
Identification No.)

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

(408) 536-6000
(Registrant’s telephone number, including area code)
 _________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller
reporting company)
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The number of shares outstanding of the registrant’s common stock as of March 22, 2019 was 487,950,943.
 



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

PART I—FINANCIAL INFORMATION
 
Item 1.

 

 

 

 

 

 

Item 2.

Item 3.

Item 4.
 
 
 
 

 PART II—OTHER INFORMATION
 
Item 1.

Item 1A.

Item 2.

Item 4.

Item 5.

Item 6.





 

2

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
 
March 1,
2019
 
November 30,
2018
 
(Unaudited)
 
(*)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,738,846

 
$
1,642,775

Short-term investments
1,487,411

 
1,586,187

Trade receivables, net of allowances for doubtful accounts of $14,639 and $14,981, respectively
1,342,343

 
1,315,578

Prepaid expenses and other current assets
565,115

 
312,499

Total current assets
5,133,715

 
4,857,039

Property and equipment, net
1,104,065

 
1,075,072

Goodwill
10,707,715

 
10,581,048

Purchased and other intangibles, net
2,017,103

 
2,069,001

Other assets
542,938

 
186,522

Total assets
$
19,505,536

 
$
18,768,682

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 

 
 

Trade payables
$
145,292

 
$
186,258

Accrued expenses
1,167,429

 
1,163,185

Debt
892,754

 

Income taxes payable
24,422

 
35,709

Deferred revenue
3,083,839

 
2,915,974

Total current liabilities
5,313,736

 
4,301,126

Long-term liabilities:
 
 
 

Debt
3,236,833

 
4,124,800

Deferred revenue
134,353

 
137,630

Income taxes payable
655,036

 
644,101

Deferred income taxes
125,660

 
46,702

Other liabilities
168,433

 
152,209

Total liabilities
9,634,051

 
9,406,568

Stockholders’ equity:
 
 
 

Preferred stock, $0.0001 par value; 2,000 shares authorized, none issued

 

Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 
488,504 and 487,663 shares outstanding, respectively
61

 
61

Additional paid-in-capital
5,857,440

 
5,685,337

Retained earnings
12,579,311

 
11,815,597

Accumulated other comprehensive income (loss)
(150,432
)
 
(148,130
)
Treasury stock, at cost (112,330 and 113,171 shares, respectively), net of reissuances
(8,414,895
)
 
(7,990,751
)
Total stockholders’ equity
9,871,485

 
9,362,114

Total liabilities and stockholders’ equity
$
19,505,536

 
$
18,768,682

_________________________________________ 
(*)
The condensed consolidated balance sheet as of November 30, 2018 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended
 
March 1,
2019
 
March 2,
2018
Revenue:
 
 
 
Subscription
$
2,304,967

 
$
1,793,358

Product
170,554

 
171,608

Services and support
125,425

 
113,981

Total revenue
2,600,946

 
2,078,947

 
Cost of revenue:
 
 
 
Subscription
288,031

 
164,685

Product
12,105

 
12,877

Services and support
97,150

 
81,340

Total cost of revenue
397,286

 
258,902

Gross profit
2,203,660

 
1,820,045

 
Operating expenses:
 
 
 
Research and development
464,637

 
348,769

Sales and marketing
781,518

 
580,957

General and administrative
216,109

 
170,440

Amortization of purchased intangibles
46,566

 
17,146

Total operating expenses
1,508,830

 
1,117,312

 Operating income
694,830

 
702,733

 
Non-operating income (expense):
 

 
 
Interest and other income (expense), net
4,266

 
16,672

Interest expense
(40,593
)
 
(19,899
)
Investment gains (losses), net
43,831

 
2,996

Total non-operating income (expense), net
7,504

 
(231
)
Income before income taxes
702,334

 
702,502

Provision for income taxes
28,093

 
119,426

Net income
$
674,241

 
$
583,076

Basic net income per share
$
1.38

 
$
1.18

Shares used to compute basic net income per share
488,056

 
492,061

Diluted net income per share
$
1.36

 
$
1.17

Shares used to compute diluted net income per share
494,188

 
499,433



  See accompanying notes to condensed consolidated financial statements.


4

Table of Contents

ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Three Months Ended
 
March 1,
2019
 
March 2,
2018
 
Increase/(Decrease)
Net income
$
674,241

 
$
583,076

Other comprehensive income (loss), net of taxes:
 
 
 
Available-for-sale securities:
 
 
 
Unrealized gains / losses on available-for-sale securities
12,402

 
(23,150
)
Reclassification adjustment for recognized gains / losses on available-for-sale securities
125

 
121

Net increase (decrease) from available-for-sale securities
12,527

 
(23,029
)
Derivatives designated as hedging instruments:
 
 
 
Unrealized gains / losses on derivative instruments
(8,457
)
 
(1,336
)
Reclassification adjustment for recognized gains / losses on derivative instruments
(8,197
)
 
(2,139
)
Net increase (decrease) from derivatives designated as hedging instruments
(16,654
)
 
(3,475
)
Foreign currency translation adjustments
1,825

 
28,386

Other comprehensive income (loss), net of taxes
(2,302
)
 
1,882

Total comprehensive income, net of taxes
$
671,939

 
$
584,958




See accompanying notes to condensed consolidated financial statements.



5

Table of Contents

ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 
 
Three Months Ended March 1, 2019
 
 
  Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 Treasury Stock
 
 
 
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Total
Balances at November 30, 2018
 
600,834

 
$
61

 
$
5,685,337

 
$
11,815,597

 
$
(148,130
)
 
(113,171
)
 
$
(7,990,751
)
 
$
9,362,114

Impacts of ASC 606 adoption
 

 

 

 
442,319

 

 

 

 
442,319

Net income
 

 

 

 
674,241

 

 

 

 
674,241

Other comprehensive income (losses), net of taxes
 

 

 

 

 
(2,302
)
 

 

 
(2,302
)
Re-issuance of treasury stock under stock compensation plans
 

 

 
(8,008
)
 
(352,846
)
 

 
2,911

 
79,873

 
(280,981
)
Purchase of treasury stock
 

 

 

 

 

 
(2,070
)
 
(500,000
)
 
(500,000
)
Stock-based compensation
 

 

 
180,111

 

 

 

 

 
180,111

Value of shares in deferred compensation plan
 

 

 

 

 

 

 
(4,017
)
 
(4,017
)
Balances at March 1, 2019
 
600,834

 
$
61

 
$
5,857,440

 
$
12,579,311

 
$
(150,432
)
 
(112,330
)
 
$
(8,414,895
)
 
$
9,871,485

 
 
Three Months Ended March 2, 2018
 
 
  Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 Treasury Stock
 
 
 
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Total
Balances at December 1, 2017
 
600,834

 
$
61

 
$
5,082,195

 
$
9,573,870

 
$
(111,821
)
 
(109,572
)
 
$
(6,084,436
)
 
$
8,459,869

Net income
 

 

 

 
583,076

 

 

 

 
583,076

Other comprehensive income (losses), net of taxes
 

 

 

 

 
1,882

 

 

 
1,882

Re-issuance of treasury stock under
stock compensation plans
 

 

 
(9,133
)
 
(326,229
)
 

 
3,245

 
94,393

 
(240,969
)
Purchase of treasury stock
 

 

 

 

 

 
(1,627
)
 
(300,000
)
 
(300,000
)
Stock-based compensation
 

 

 
135,526

 

 

 

 

 
135,526

Value of shares in deferred compensation plan
 

 

 

 

 

 

 
(5,038
)
 
(5,038
)
Impacts of the U.S. Tax Cut and Jobs Act
 

 

 

 
(318
)
 

 

 

 
(318
)
Balances at March 2, 2018
 
600,834

 
$
61

 
$
5,208,588

 
$
9,830,399

 
$
(109,939
)
 
(107,954
)
 
$
(6,295,081
)
 
$
8,634,028



See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

ADOBE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended
 
March 1,
2019
 
March 2,
2018
Cash flows from operating activities:
 
 
 
Net income
$
674,241

 
$
583,076

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 
Depreciation, amortization and accretion
144,898

 
76,522

Stock-based compensation
184,688

 
135,526

Deferred income taxes
(18,810
)
 
(431,494
)
Unrealized losses (gains) on investments, net
(41,678
)
 
(929
)
Other non-cash items
1,344

 
1,457

Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
 
 
 
Trade receivables, net
64,544

 
154,398

Prepaid expenses and other assets
(107,423
)
 
(64,953
)
Trade payables
(41,078
)
 
17,552

Accrued expenses
(19,503
)
 
(70,508
)
Income taxes payable
5,995

 
511,292

Deferred revenue
166,230

 
77,662

Net cash provided by operating activities
1,013,448

 
989,601

Cash flows from investing activities:
 

 
 

Purchases of short-term investments

 
(332,105
)
Maturities of short-term investments
96,322

 
153,885

Proceeds from sales of short-term investments
13,948

 
186,114

Acquisitions, net of cash acquired
(99,817
)
 

Purchases of property and equipment
(65,268
)
 
(95,142
)
Purchases of long-term investments, intangibles and other assets
(77,561
)
 
(9,391
)
Proceeds from sale of long-term investments and other assets
458

 
2,877

Net cash used for investing activities
(131,918
)
 
(93,762
)
Cash flows from financing activities:
 

 
 

Purchases of treasury stock
(500,000
)
 
(300,000
)
Proceeds from issuance of treasury stock
71,594

 
64,384

Taxes paid related to net share settlement of equity awards
(352,575
)
 
(305,353
)
Repayment of capital lease obligations
(2,931
)
 
(304
)
Net cash used for financing activities
(783,912
)
 
(541,273
)
Effect of foreign currency exchange rates on cash and cash equivalents
(1,547
)
 
6,343

Net increase in cash and cash equivalents
96,071

 
360,909

Cash and cash equivalents at beginning of period
1,642,775

 
2,306,072

Cash and cash equivalents at end of period
$
1,738,846

 
$
2,666,981

Supplemental disclosures:
 

 
 
Cash paid for income taxes, net of refunds
$
51,887

 
$
31,107

Cash paid for interest
$
50,828

 
$
26,410



See accompanying notes to condensed consolidated financial statements.

7

Table of Contents

ADOBE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(Unaudited)

NOTE 1.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended November 30, 2018 on file with the SEC (our “Annual Report”).
Recently Adopted Accounting Guidance
On May 28, 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, Topic 606, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new revenue standard replaces most existing revenue recognition guidance in GAAP and permits the use of either the full retrospective or modified retrospective transition method.
On December 1, 2018, the beginning of our fiscal year 2019, we adopted the requirements of the new revenue standard utilizing the modified retrospective method of transition. Prior period information has not been restated and continues to be reported under the accounting standard in effect for those periods. We applied the new revenue standard to contracts that were not completed as of the adoption date, consistent with the transition guidance. Further, adoption of the new revenue standard resulted in changes to our accounting policies for revenue recognition and sales commissions as detailed below.
We recognized the following cumulative effects of initially applying the new revenue standard as of December 1, 2018:
 
As of
November 30, 2018
 
ASC 606 Adoption Adjustments
 
As of
December 1, 2018
Assets
 
 
 
 
 
Trade receivables, net of allowances for doubtful accounts
$
1,315,578

 
$
43,028

 
$
1,358,606

Prepaid expenses and other current assets
312,499

 
186,220

 
498,719

Other assets
186,522

 
273,421

 
459,943

Liabilities and Stockholders’ Equity
 
 
 
 
 
Accrued expenses
1,163,185

 
30,358

 
1,193,543

Deferred revenue, current
2,915,974

 
(52,842
)
 
2,863,132

Deferred income taxes
46,702

 
82,834

 
129,536

Retained earnings
$
11,815,597

 
$
442,319

 
$
12,257,916



Below is a summary of the adoption impacts of the new revenue standard:
We capitalized $413.2 million of contract acquisition costs comprised of sales and partner commission costs at adoption date, with a corresponding adjustment to retained earnings. We are amortizing these costs over their respective expected period of benefit.
Revenue for certain contracts that were previously deferred would have been recognized in periods prior to adoption under the new standard. Upon adoption, we recorded the following adjustments to our beginning balances to reflect the amount of revenue that will no longer be recognized in future periods for such contracts: increase in unbilled receivables (included in trade receivables, net) of $24.8 million, increase in contract assets (included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion) of $46.4 million and a decrease in deferred revenue of $52.8 million, with corresponding adjustments to retained earnings.

8

Table of Contents

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

We recorded an increase to our opening deferred income tax liability of $82.8 million, with a corresponding adjustment to retained earnings, to record the tax effect of the above adjustments.
Further, we had other impacts to various accounts which resulted to an immaterial net reduction to our retained earnings.
Adoption of the new revenue standard impacted our condensed consolidated statement of income for three months ended March 1, 2019 as follows (in thousands, except per share amounts):
 
As reported
 
Adjustments
 
Balances without ASC 606 adoption impact
Revenue
 
 
 
 
 
Subscription
$
2,304,967

 
$
2,207

 
$
2,307,174

Product
170,554

 
(22,880
)
 
147,674

Services and support
125,425

 
(771
)
 
124,654

Total revenue
2,600,946

 
(21,444
)
 
2,579,502

 Operating expenses
 
 
 
 
 
Sales and marketing
781,518

 
8,868

 
790,386

Provision for income taxes
28,093

 
(1,210
)
 
26,883

Net income
$
674,241

 
$
(29,053
)
 
$
645,188

Basic net income per share
$
1.38

 
$
(0.06
)
 
$
1.32

Diluted net income per share
$
1.36

 
$
(0.05
)
 
$
1.31


Adoption of the new revenue standard impacted our condensed consolidated balance sheets as of March 1, 2019 as follows (in thousands):
 
As reported
 
Adjustments
 
Balances without ASC 606 adoption impact
Assets
 
 
 
 
 
Trade receivables, net of allowances for doubtful accounts
$
1,342,343

 
$
(48,662
)
 
$
1,293,681

Prepaid expenses and other current assets
565,115

 
(195,006
)
 
370,109

Other assets
542,938

 
(287,165
)
 
255,773

Liabilities and Stockholders’ Equity
 
 
 
 
 
Accrued expenses
1,167,429

 
(37,547
)
 
1,129,882

Deferred revenue, current
3,083,839

 
68,206

 
3,152,045

Deferred revenue, long-term
134,353

 
(6,076
)
 
128,277

Deferred income taxes
125,660

 
(84,044
)
 
41,616

Retained earnings
$
12,579,311

 
$
(471,372
)
 
$
12,107,939



There was no net impact to our condensed consolidated statements of comprehensive income and cash flows from operating, financing or investing activities on the condensed consolidated cash flows resulting from the adoption of the new revenue standard other than the impact to reported net income as presented above. The impact to our condensed consolidated statement of stockholders’ equity was only to retained earnings, as presented above.
The most significant impact of the new revenue standard relates to our capitalization of certain incremental costs to acquire contracts and the requirement to amortize these amounts over the expected period of benefit. Under the previous standard, we expensed costs related to the acquisition of revenue-generating contracts as incurred. Additionally, there was impact from

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arrangements with our customers that include on-premise term-based software licenses bundled with maintenance and support. Under the previous standard, revenue attributable to these software licenses was recognized ratably over the term of the arrangement because vendor-specific objective evidence (“VSOE”) did not exist for the undelivered maintenance and support element as it is not sold separately. The requirement to have VSOE for undelivered elements to enable the separation of revenue recognition for delivered software licenses is eliminated under the new revenue standard. Accordingly, under the new revenue standard we recognize as revenue a portion of the arrangement fee upon delivery of the software licenses and classify that recognized revenue as product revenue instead of subscription revenue in our condensed consolidated statements of income.
Other impacts to our policies and disclosures include earlier recognition of revenue for certain contracts due to the elimination of contingent revenue limitations, the requirement to estimate variable consideration for certain arrangements, increased allocation of revenue to and from professional services and other offerings and changes to our financial statement disclosures such as new disclosures related to our remaining performance obligations. However, the timing and pattern of revenue recognition related to our professional services and cloud-enabled offerings, including Creative Cloud and Document Cloud for enterprises, individuals and teams, remain substantially unchanged. When Creative Cloud and Document Cloud are sold with cloud-enabled services, the on-premise/on-device software licenses and cloud-enabled services are so highly interrelated and interdependent that they are not each separately identifiable within the context of the contract and therefore not distinct from each other. Revenue for these offerings continues to be recognized ratably over the subscription period for which the cloud-enabled services are provided.
Significant Accounting Policies
Revenue Recognition
For revenue recognition policies under Accounting Standards Codification Topic 605, refer to Note 1. Basis of Presentation and Significant Accounting Policies in our Annual Report.
Our revenue is derived from the sale of cloud-enabled software subscriptions, cloud-hosted offerings, term-based, royalty, and perpetual software licenses, associated software maintenance and support plans, consulting services, training and technical support. Most of our enterprise customer arrangements involve multiple promises to our customers.
Revenue is recognized when a contract exists between us and a customer and upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which may be capable of being distinct and accounted for as separate performance obligations, or in the case of offerings such as Creative Cloud and Document Cloud, accounted for as a single performance obligation. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Product, Subscription, and Services Offerings
We enter into revenue arrangements in which a customer may purchase a combination of cloud-enabled subscriptions, cloud-hosted offerings, term-based, royalty, and perpetual software licenses, associated software maintenance and support plans, consulting services, training and technical support.
Fully hosted subscription services (Software-as-a-Service) allow customers to access hosted software during the contractual term without taking possession of the software. Cloud-hosted subscription services may be sold on a fee-per-subscription period basis, or based on consumption or usage.
We recognize revenue ratably over the contractual service term for hosted services that are priced based on a committed number of transactions where the delivery and consumption of the benefit of the services occur evenly over time, beginning on the date the services associated with the committed transactions are first made available to the customer and continuing through the end of the contractual service term. Over-usage fees and fees based on the actual number of transactions, are billed in accordance with contract terms as these fees are typically incurred and are included in the transaction price of an arrangement as variable consideration. Fees based on a number of transactions or impressions per month, where invoicing is aligned to the pattern of performance, customer benefit, and consumption, are typically accounted for utilizing the “as-invoiced” practical expedient. Revenue for subscriptions sold as a fee per period is recognized ratably over the contractual term as the customer simultaneously receives and consumes the benefit of the underlying service.

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When cloud-enabled services are highly integrated and interrelated with on-premise software, such as in our cloud-enabled Creative Cloud and Document Cloud offerings, the individual components are not considered distinct and revenue is recognized ratably over the subscription period for which the cloud-enabled services are provided.
Licenses for on-premise software may be purchased on a perpetual basis, as a subscription for a fixed period of time or based on usage for certain of our OEM and royalty agreements. Revenue from distinct on-premise licenses is recognized at the point in time the software is available to the customer, provided all other revenue recognition criteria are met, and classified as product revenue on the condensed consolidated statements of income. Some of our enterprise license arrangements allow customers to commit non-cancellable funds. These non-cancellable committed funds are nonrefundable and provide our customers options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services. Revenue associated with these monthly term-based licenses is classified as subscription revenue.
Our services and support revenue is composed of consulting, training, and maintenance and support, primarily related to our enterprise offerings. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. We typically sell our consulting contracts on a time-and-materials basis and recognize the related revenue as services are rendered. We typically sell our maintenance and support contracts on a flat fee or percentage of associated license fees basis and recognize the related revenue ratably over the support term as the underlying service is a stand-ready performance obligation.
We exclude from the transaction price sales and other taxes collected from customers on behalf of the relevant government authority. Most of our products are delivered electronically, however in instances where shipping and handling costs are incurred, we treat these amounts as costs to fulfill the contract and they are not considered a performance obligation and the associated fees are not included in the transaction price.
Judgments
Our contracts with customers may include multiple goods and services. For example, some of our offerings include both on-premise and/or on-device software licenses and cloud services. Determining whether the software licenses and the cloud services are distinct from each other, and therefore performance obligations to be accounted for separately, or not distinct from each other, and therefore part of a single performance obligation, may require significant judgment. We have concluded that the on-premise/on-device software licenses and cloud services provided in our Creative Cloud and Document Cloud subscription offerings are not distinct from each other such that revenue from each offering should be recognized ratably over the subscription period for which the cloud services are provided. In reaching this conclusion, we considered the nature of our promise to Creative Cloud and Document Cloud customers, which is to provide a complete end-to-end creative design or document workflow solution that operates seamlessly across multiple devices and teams. We fulfill this promise by providing access to a solution that integrates cloud-based and on-premise/on-device features that, together through their integration, provide functionalities, utility and workflow efficiencies that could not be obtained from either the on-premise/on-device software or cloud services on their own.
Standalone selling price is established by maximizing the amount of observable inputs, primarily actual historical selling prices for performance obligations where available, and includes consideration of factors such as go-to-market model and geography. Individual products may have multiple values for standalone selling price depending on factors such as where they are sold and what channel they are sold through. Where standalone selling price may not be directly observable (e.g., the performance obligation is not sold separately), we maximize the use of observable inputs by using information that may include reviewing pricing practices, performance obligations with similar customers and selling models.
Capitalized costs to obtain a contract are amortized over the expected period of benefit, which we have determined, based on analysis, to be 5 years. We evaluated qualitative and quantitative factors to determine the period of amortization, including contract length, renewals, customer life and the useful lives of our products and acquired products. When the expected period of benefit of an asset which would be capitalized is less than one year, we expense the amount as incurred, utilizing the practical expedient. We regularly evaluate whether there have been changes in the underlying assumptions and data used to determine the amortization period.
We offer limited rights of return, rebates and price protection of our products under various policies and programs with our distributors, resellers and/or end-user customers. We estimate and record reserves for these programs as variable consideration

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when estimating transaction price. Returns, rebates and other offsets to transaction price are estimated at contract inception on a portfolio basis and assessed for reasonableness each reporting period when additional information becomes available.
General Contract Provisions
We maintain revenue reserves for rebates, rights of return, or other limited price adjustments.
Distributors are allowed limited rights of return of products purchased during the previous quarter. In addition, distributors are allowed to return products that have reached the end of their lives, as defined by us, and for products that are being replaced by new versions.
We offer rebates to our distributors, resellers and/or end user customers. Transaction price is reduced for these amounts based on actual performance against objectives set forth by us for a particular reporting period, such as volume and timely reporting.
On a quarterly basis, the amount of revenue that is reserved is calculated based on our historical trends and data specific to each reporting period. The primary method of establishing these reserves is to review historical data from prior periods as a percent of revenue to determine a historical reserve rate. We then apply the historical rate to the current period revenue as a basis for estimating future returns. When necessary, we also provide a specific reserve in excess of portfolio-level estimated requirements. This estimate can be affected by the amount of a particular product in the channel, the rate of sell-through, product plans and other factors.
Although our subscription contracts are generally non-cancellable, a limited number of customers have the right to cancel their contracts by providing prior written notice to us of their intent to cancel the remainder of the contract term and consumers have a period of time to terminate certain agreements without penalty. In the event a customer cancels their contract, they are generally not entitled to a refund for prior services we have provided to them. Contracts that include termination rights without substantive penalty are accounted for as contracts only for the committed period. Periods of time after the right of termination are accounted for as optional purchases when they do not represent material rights. For certain of our usage-based license agreements, typically in our royalty and OEM businesses, reporting may be received after the end of a fiscal period. In such instances, we estimate and accrue license revenue. We base our estimates on multiple factors, including historical sales information, seasonality and other business information which may impact our estimates. We do not estimate variable consideration for our sales and usage-based license royalty agreements, consistent with the associated practical expedient under the new revenue standard.
Recent Accounting Pronouncements Not Yet Effective
On February 24, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases with a lease term of twelve months or less. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new leases standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new leases standard is effective for us beginning in the first quarter of fiscal 2020, and we will not early adopt.
The new leases standard must be adopted using a modified retrospective transition method and allows for the application of the new guidance at the beginning of the earliest comparative period presented or at the adoption date. In July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements, providing an optional transition method that allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We intend to adopt the new leases standard using this optional transition method.
While we are continuing to assess the potential impacts of the standard, we currently expect the most significant impact will be the recognition of right-of-use assets and lease liabilities on our balance sheet. We are implementing a new lease accounting system and are updating our processes in preparation for the adoption of the new leases standard.
On August 28, 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging, requiring expanded hedge accounting for both non-financial and financial risk components and refining the measurement of hedge results to better reflect an entity’s hedging strategies. For example, adoption would result in reclassification of hedge costs from foreign currency hedges from interest and other income (expense), net to revenue in our statements of income. The updated standard also amends the presentation and

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disclosure requirements and changes how entities assess hedge effectiveness. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition with a cumulative-effect adjustment recorded to opening retained earnings as of the initial adoption date. The updated standard is effective for us beginning in the first quarter of fiscal 2020, which is when we plan to adopt the standard. We are currently evaluating the effect that the updated standard will have on our condensed consolidated financial statements and related disclosures.
With the exception of the new standards discussed above, there have been no other recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 1, 2019, as compared to the recent accounting pronouncements described in our Annual Report, that are of significance or potential significance to us.
NOTE 2.  REVENUE
Revenue in the first quarter of fiscal 2019 presented below is in accordance with a new revenue standard that was adopted under the modified retrospective method. Prior period revenue has not been restated.

Our segment results for the three months ended March 1, 2019 and March 2, 2018 were as follows (dollars in thousands):
 
Digital
Media
 
Digital
Experience
 
Publishing
 
Total
Three months ended March 1, 2019
 
 
 
 
 
 
 
Revenue
$
1,776,643

 
$
743,276

 
$
81,027

 
$
2,600,946

Cost of revenue
68,195

 
323,708

 
5,383

 
397,286

Gross profit
$
1,708,448

 
$
419,568

 
$
75,644

 
$
2,203,660

Gross profit as a percentage of revenue
96
%
 
56
%
 
93
%
 
85
%
Three months ended March 2, 2018
 
 
 
 
 
 
 
Revenue
$
1,460,561

 
$
554,107

 
$
64,279

 
$
2,078,947

Cost of revenue
55,469

 
198,792

 
4,641

 
258,902

Gross profit
$
1,405,092

 
$
355,315

 
$
59,638

 
$
1,820,045

Gross profit as a percentage of revenue
96
%
 
64
%
 
93
%
 
88
%

Revenue by geographic area for the three months ended March 1, 2019 and March 2, 2018 is as follows (in thousands):
 
2019
 
2018
Americas
$
1,509,895

 
$
1,170,681

EMEA
702,961

 
587,268

APAC
388,090

 
320,998

Total
$
2,600,946

 
$
2,078,947


Revenue by major offerings in our Digital Media reportable segment for the three months ended March 1, 2019 and March 2, 2018 is as follows (in thousands):
 
2019
 
2018
Creative Cloud
$
1,494,888

 
$
1,229,496

Document Cloud
281,755

 
231,065

Total
$
1,776,643

 
$
1,460,561


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Subscription revenue by segment for the three months ended March 1, 2019 and March 2, 2018 is as follows (in thousands):
 
2019
 
2018
Digital Media
$
1,663,639

 
$
1,334,659

Digital Experience
611,928

 
430,867

Publishing
29,400

 
27,832

Total
$
2,304,967

 
$
1,793,358

Contract Balances
Trade Receivables
A receivable is recorded when an unconditional right to invoice and receive payment exists, such that only the passage of time is required before payment of consideration is due. Timing of revenue recognition may differ from the timing of invoicing to customers. Certain performance obligations may require payment before delivery of the license or service to the customer. Included in trade receivables on the condensed consolidated balance sheets are unbilled receivable balances which have not yet been invoiced, and are typically related to license revenue or services which are delivered prior to invoicing occurring.
The opening balance of trade receivables, net of allowances for doubtful accounts, as of December 1, 2018 was $1.36 billion, inclusive of unbilled receivables of $105.8 million. As of March 1, 2019, the balance of trade receivables, net of allowances for doubtful accounts, was $1.34 billion, inclusive of unbilled receivables of $93.4 million.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts which reflects our best estimate of potentially uncollectible trade receivables. The allowance is based on both specific and general reserves. We regularly review our trade receivables allowance by considering such factors as historical experience, credit-worthiness, the age of the trade receivable balances and current economic conditions that may affect a customer’s ability to pay and we specifically reserve for those deemed uncollectible. As of March 1, 2019 and December 1, 2018, allowance for doubtful accounts was $14.6 million and $15.0 million, respectively.
Contract Assets
A contract asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract assets are typically related to subscription and hosted service contracts where the transaction price allocated to the satisfied performance obligations exceeds the value of billings to date. Contract assets are included in prepaid expenses and other current assets for the current portion and other assets for the long-term portion on the condensed consolidated balance sheets. 
The opening balance of contract assets as of December 1, 2018 was $46.4 million. As of March 1, 2019, the balance of contract assets was $47.7 million.
Deferred Revenue and Remaining Performance Obligations
Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from subscription services, including non-cancellable and non-refundable committed funds and deposits. Deferred revenue is recognized as revenue when transfer of control to customers has occurred. Customers are typically invoiced for these agreements in regular installments and revenue is recognized ratably over the contractual subscription period. The deferred revenue balance is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing, size and new business linearity within the quarter. Deferred revenue does not represent the total contract value of annual or multi-year non-cancellable subscription agreements.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, such as invoicing at the beginning of a

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subscription term with revenue recognized ratably over the contract period, and not to receive financing from our customers. Any potential financing fees are considered insignificant in the context of our contracts.
The adjusted opening balance of deferred revenue as of December 1, 2018 was $3.00 billion. As of March 1, 2019, the balance of deferred revenue was $3.22 billion, inclusive of $602.3 million of non-cancellable and non-refundable committed funds and $73.0 million refundable customer deposits. Arrangements with non-cancellable and non-refundable committed funds provide our customers options to either renew monthly on-premise term-based licenses or use some or all funds to purchase other Adobe products or services. Refundable customer deposits represent arrangements in which the customer has a unilateral cancellation right for which we are obligated to refund amounts paid related to products or services not yet delivered or provided at the time of cancellation on a prorated basis.
Significant movements in the deferred revenue balance during the period consisted of increases due to payments received prior to transfer of control of the underlying performance obligations to the customer and deferred revenue assumed through business combinations, which were offset by decreases due to revenue recognized in the period. During the three months ended March 1, 2019, $1.36 billion of revenue was recognized that was included in the deferred revenue balance at the beginning of the period.
Transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and unbilled amounts that will be recognized as revenue in future periods. Transaction price allocated to the remaining performance obligation is influenced by several factors, including the timing of renewals and average contract terms. We applied practical expedients to exclude amounts related to performance obligations that are billed and recognized as they are delivered, optional purchases that do not represent material rights, sales- and usage-based royalties not yet consumed and any estimated amounts of variable consideration that are subject to constraint in accordance with the new revenue standard.
Remaining performance obligations were approximately $8.13 billion as of March 1, 2019, which includes $602.3 million of non-cancellable committed funds related to some of our enterprise customer agreements. Approximately 73% of the remaining performance obligations, excluding the aforementioned enterprise customer agreements, are expected to be recognized over the next 12 months with the remainder recognized thereafter.
Contract Acquisition Costs
We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized.
The costs capitalized under the new revenue standard are primarily sales commissions paid to our sales force personnel. Capitalized costs may also include portions of fringe benefits and payroll taxes associated with compensation for incremental costs to acquire customer contracts and incentive payments to partners.
Capitalized costs to obtain a contract are amortized over the expected period of benefit, which we have determined, based on analysis, to be 5 years. Amortization of capitalized costs are included in our sales and marketing expense in our condensed consolidated statements of income.
The opening balance of capitalized contract acquisition costs as of December 1, 2018 was $413.2 million. As of March 1, 2019, the balance of capitalized contract acquisition costs was $434.4 million, of which $287.2 million was long-term and included in other assets in the condensed consolidated balance sheets. The remaining balance of the capitalized costs to obtain contracts were current and included in prepaid expenses and other current assets.
Refund Liabilities
As part of our revenue reserves, we record refund liabilities for amounts that may be subject to future refunds, which include sales returns reserves and customer rebates and credits. Refund liabilities are included in accrued expenses on the condensed consolidated balance sheets. 
The opening balance of refund liabilities as of December 1, 2018 was $75.3 million. As of March 1, 2019, the balance of refund liabilities was $87.1 million.

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

In conjunction with the acquisition, we separately recognized an investment gain of approximately $41.5 million, which represents the difference between the acquisition-date fair value of our pre-existing equity interest, $54.4 million, and our previous carrying amount.
Under the acquisition method of accounting, the total purchase price was preliminarily allocated to Allegorithmic’s net tangible and intangible assets based upon their estimated fair values as of January 23, 2019. The total purchase price for Allegorithmic was preliminarily allocated to goodwill that is non-deductible for tax purposes of $124.5 million and to identifiable intangible assets of $45.0 million, with the remaining amount representing net liabilities assumed. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date and are considered preliminary pending finalization of valuation analyses pertaining to intangible assets acquired and tax liabilities assumed including the calculation of deferred tax assets and liabilities.

Pro forma financial information has not been presented for this acquisition as the impact to our condensed consolidated financial statements was not material.
Marketo
On October 31, 2018, we completed the acquisition of Marketo, a privately held marketing cloud platform company, for approximately $4.73 billion of cash consideration. Adding Marketo’s engagement platform to Adobe Experience Cloud furthers our long-term plan for strategic growth in the Digital Experience segment and enables us to offer a comprehensive set of solutions to enable customers across industries and companies automate and orchestrate their marketing activities. Under the terms of the Share Purchase Agreement (“Purchase Agreement”), we acquired all of the issued and outstanding shares of capital stock of Milestone Topco, Inc., a Delaware corporation (“Topco”) and indirect parent company of Marketo, and other equity interests in Marketo. In connection with the acquisition, each Marketo equity award that was issued and outstanding was cancelled and extinguished in exchange for cash consideration. Also pursuant to the Purchase Agreement, upon closing of the transaction, cash was paid for the settlement of Marketo’s long-term incentive plan, the settlement of Marketo’s indebtedness and the acquisition of all remaining equity interests in Marketo K.K., a Japanese corporation and joint venture.

In connection with the acquisition of Marketo, we entered into a credit agreement providing for a $2.25 billion senior unsecured term loan (“Term Loan”). The proceeds of the Term Loan were used to (i) fund a portion of the purchase price of the acquisition and (ii) to pay fees and expenses incurred in connection with the acquisition. The Term Loan funds were received on October 31, 2018 upon closing of the acquisition and will mature 18 months following the initial funding date. See Note 14 for further details regarding our debt.

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


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Purchase Price Allocation

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

The table below represents the preliminary purchase price allocation to the acquired net tangible and intangible assets of Marketo based on their estimated fair values as of the acquisition date and the associated estimated useful lives at that date. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date and are considered preliminary pending finalization of valuation analyses pertaining tax liabilities assumed including the calculation of deferred tax assets and liabilities.
(in thousands)
Amount
 
Weighted Average Useful Life (years)
Customer contracts and relationships
$
577,900

 
11
Purchased technology
444,500

 
7
Backlog
105,800

 
2
Non-competition agreements
12,100

 
2
Trademarks
328,500

 
9
Total identifiable intangible assets
1,468,800

 
 
Net liabilities assumed
(194,588
)
 
N/A
Goodwill (1)
3,458,556

 
N/A
Total estimated purchase price
$
4,732,768

 
 
_________________________________________ 
(1) 
Non-deductible for tax-purposes.

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

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

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


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

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

Any impairment charges made in the future associated with goodwill will not be tax deductible and will result in an increased effective income tax rate in the quarter the impairment is recorded.
Magento
On June 18, 2018, we completed our acquisition of Magento Commerce (“Magento”), a privately-held commerce platform company. During the third quarter of fiscal 2018, we began integrating Magento into our Digital Experience reportable segment.
The table below represents the preliminary purchase price allocation to the acquired net assets of Magento based on their estimated fair values as of June 18, 2018 and the associated estimated useful lives at that date. During the first quarter of fiscal 2019, we recorded immaterial purchase accounting adjustments based on changes to management’s estimates and assumptions in regards to net liabilities assumed and their related impact to goodwill. The fair values assigned to assets acquired and liabilities assumed are based on management’s best estimates and assumptions as of the reporting date and are considered preliminary pending finalization of valuation analyses pertaining to tax liabilities assumed including the calculation of deferred tax assets and liabilities.
(in thousands)
Amount
 
Weighted Average Useful Life (years)
Customer contracts and relationships
$
208,000

 
8
Purchased technology
84,200

 
5
In-process research and development (1)
39,100

 
N/A
Trademarks
21,100

 
3
Other intangibles
43,400

 
3
Total identifiable intangible assets
395,800

 
 
Net liabilities assumed
(68,182
)
 
N/A
Goodwill (2)
1,316,983

 
N/A
Total estimated purchase price
$
1,644,601

 
 

_________________________________________ 
(1) 
Capitalized as purchased technology and are considered indefinite lived until the completion or abandonment of the associated research and development efforts. As of the reporting date, one of the associated in-process research and development efforts was completed and another one was abandoned. The respective related amortization and write-off were each immaterial.
(2) 
Non-deductible for tax-purposes.


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Table of Contents

ADOBE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 4.  CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. We classify all of our cash equivalents and short-term investments as “available-for-sale.” In general, these investments are free of trading restrictions. We carry these investments at fair value, based on quoted market prices or other readily available market information. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our condensed consolidated balance sheets. Gains and losses are recognized when realized in our condensed consolidated statements of income. When we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is recognized in income. Gains and losses are determined using the specific identification method.
Cash, cash equivalents and short-term investments consisted of the following as of March 1, 2019 (in thousands):
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated
Fair Value
Current assets:
 
 
 
 
 
 
 
Cash
$
341,359

 
$

 
$

 
$
341,359

Cash equivalents:
 
 
 
 
 
 
 
Money market mutual funds
1,383,033

 

 

 
1,383,033

Time deposits
14,454

 

 

 
14,454

Total cash equivalents
1,397,487

 

 

 
1,397,487

Total cash and cash equivalents
1,738,846

 

 

 
1,738,846

Short-term fixed income securities:
 
 
 
 
 
 
 
Asset-backed securities
33,623

 

 
(185
)
 
33,438

Corporate debt securities
1,445,943

 
129

 
(12,576
)
 
1,433,496

Foreign government securities
2,399

 

 
(13
)
 
2,386

Municipal securities
18,248

 

 
(157
)
 
18,091

Total short-term investments