Stock-Based Compensation

3 Months Ended

Mar. 01, 2019

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock Plan

As of March 1, 2019, we had reserved 200.7 million shares of common stock for issuance under our 2003 Equity Incentive Plan and had 45.4 million shares available for grant.

Summary of Restricted Stock Units

Restricted stock unit activity for the three months ended March 1, 2019 and the fiscal year ended November 30, 2018 was as follows (in thousands):



	2019		2018
Beginning outstanding balance	8,668		9,304
Awarded	3,361		4,012
Released	(2,947	)	(3,988	)
Forfeited	(148	)	(660	)
Ending outstanding balance	8,934		8,668

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

Information regarding restricted stock units outstanding at March 1, 2019 and March 2, 2018 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2019
Restricted stock units outstanding	8,934	1.61	$	2,358.7
Restricted stock units vested and expected to vest	7,979	1.55	$	2,106.6
2018
Restricted stock units outstanding	9,195	1.52	$	1,928.9
Restricted stock units vested and expected to vest	8,259	1.47	$	1,732.6

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^(*)	The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of March 1, 2019 and March 2, 2018 were $264.01 and $209.79, respectively.

Summary of Performance Shares

Our Performance Share Programs aim to help focus key employees on building stockholder value, provide significant award potential for achieving outstanding Company performance and enhance the ability of the Company to attract and retain highly talented and competent individuals. The Executive Compensation Committee of our Board of Directors approves the terms of each of our Performance Share Programs, including the award calculation methodology, under the terms of our 2003 Equity Incentive Plan. Shares may be earned based on the achievement of an objective relative total stockholder return measured over a three-year performance period. Performance share awards will be awarded and fully vest upon the Executive Compensation Committee’s certification of the level of achievement following the three-year anniversary of each grant date. Program participants generally have the ability to receive up to 200% of the target number of shares originally granted.

In the first quarter of fiscal 2019, the Executive Compensation Committee approved the 2019 Performance Share Program.

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

In the first quarter of fiscal 2018, the Executive Compensation Committee certified the actual performance achievement of participants in the 2015 Performance Share Program. Actual performance resulted in participants achieving 200% of target or approximately 1.0 million shares. The shares granted and achieved under the 2015 Performance Share Program fully vested on the three-year anniversary of the grant on January 24, 2018, if not forfeited.

As of March 1, 2019, the shares awarded under our 2019, 2018, and 2017 Performance Share Programs are yet to be achieved.

The following table sets forth the summary of performance share activity under our Performance Share Programs for the three months ended March 1, 2019 and the fiscal year ended November 30, 2018 (in thousands):



	2019					2018
	Shares Granted			Maximum Shares Eligible to Receive		Shares Granted			Maximum Shares Eligible to Receive
Beginning outstanding balance	1,148			2,296		1,534			3,068
Awarded	722		⁽¹⁾	614		837		⁽²⁾	628
Achieved	(830	)	⁽³⁾	(830	)	(1,050	)	⁽³⁾	(1,053	)
Forfeited	(11	)		(22	)	(173	)		(347	)
Ending outstanding balance	1,029			2,058		1,148			2,296

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


⁽²⁾	Included in the 0.8 million shares awarded during the fiscal year ended November 30, 2018 were 0.5 million shares awarded for the final achievement of the 2015 Performance Share program. The remaining awarded shares were for the 2018 Performance Share Program.


⁽³⁾	Shares achieved under our 2016 and 2015 Performance Share programs which resulted from 200% achievement of target.

Summary of Employee Stock Purchase Plan Shares

The expected life of the ESPP shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights during the three months ended March 1, 2019 and March 2, 2018 were as follows:



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

Employees purchased 0.5 million shares at an average price of $129.23 and 0.7 million shares at an average price of $91.74 for the three months ended March 1, 2019 and March 2, 2018, respectively. The intrinsic value of shares purchased during the three months ended March 1, 2019 and March 2, 2018 was $51.2 million and $54.3 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.

Summary of Stock Options

The Executive Compensation Committee of Adobe’s Board of Directors eliminated the use of stock option grants for all employees and the Board of Directors effective fiscal 2012 and fiscal 2014, respectively. However, we may assume the stock option plans of certain companies we acquire. As of March 1, 2019 and November 30, 2018, we had 0.2 million and 0.3 million stock options outstanding, respectively.

Compensation Costs

As of March 1, 2019, there was $1.64 billion of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 2.6 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

Total stock-based compensation costs included in our condensed consolidated statements of income for the three months ended March 1, 2019 and March 2, 2018 were as follows (in thousands):



	2019				2018
Income Statement Classifications	Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock Units and Performance Share Awards
Cost of revenue—subscription	$	1,390	$	5,182	$	768	$	3,944
Cost of revenue—services and support	1,998		3,817		2,016		2,986
Research and development	8,445		75,820		5,349		54,072
Sales and marketing	10,353		52,247		5,320		38,848
General and administrative	3,281		22,155		1,480		20,742
Total	$	25,467	$	159,221	$	14,933	$	120,592