Washington, D.C. 20549
Alphabet Inc.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Alphabet Inc.
Form 10-Q
For the Quarterly Period Ended September 30, 20172022
TABLE OF CONTENTS
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| Item 1 | | |
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Item 62 | | |
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NOTE ABOUT FORWARD-LOOKING STATEMENTSNote About Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding:
•the ongoing effect of the novel coronavirus pandemic ("COVID-19"), including its macroeconomic effects on our business, operations, and financial results;
•the growth of our business and revenues and our expectations about the factors that influence our success and trends in our business;
our plans to continue to invest in new businesses, products, services and technologies, systems, facilities, and infrastructure, to continue to hire aggressively and provide competitive compensation programs, as well as to continue to invest in acquisitions;
seasonal •fluctuations in internet usage and advertiser expenditures, underlying business trends such as traditional retail seasonality, and macroeconomic conditions, which are likely to cause fluctuations in our quarterly results;
the potential for declines in our revenue growth rate;rate and operating margin and various factors contributing to such fluctuations;
•our expectation that the continuing shift from an offline to online world will continue to benefit our business;
•our expectation that the portion of our revenues that we derive from non-advertising revenues will continue to increase and may affect our margins;
•our expectation that our traffic acquisition costs (TAC) and the associated TAC rate will fluctuate, which could affect our overall margins;
•our expectation that our monetization trends will fluctuate, which could affect our revenues and margins;
•fluctuations in our revenue growth, as well as the change in paid clicks and cost-per-click and the change in impressions and cost-per-impression, and various factors contributing to such fluctuations;
•our expectation that we will continue to take steps to improve the relevance of the ads we deliverperiodically review, refine, and to reduceupdate our methodologies for monitoring, gathering, and counting the number of accidental clicks;
fluctuations in the rate of change in revenue and revenue growth, as well as the rate of change in paid clicks and average cost-per-click and various factors contributing to such fluctuations;impressions;
•our expectation that our results will be affected by our performance in international markets as users in developing economies increasingly come online;
•our expectation that our foreign exchange risk management program will not fully offset our net exposure to fluctuations in foreign currency exchange rates;
•the expected variability of costsgains and losses related to hedging activities under our foreign exchange risk management program;
•the amount and timing of revenue recognition from customer contracts with commitments for performance obligations, including our estimate of the remaining amount of commitments and when we expect to recognize revenue;
•fluctuations in our capital expenditures;
•our plans to continue to invest in new businesses, products, services and technologies, systems, land and buildings for data centers and offices, and infrastructure, as well as to continue to invest in acquisitions and strategic investments;
•our pace of hiring and our plans to provide competitive compensation programs;
•our expectation that our cost of revenues, research and development (R&D) expenses, sales and marketing expenses, and general and administrative expenses willmay increase in dollars andamount and/or may increase as a percentage of revenues;
our potential exposure in connection with pending investigations, proceedings, and other contingencies;
our expectation that our monetization trends will fluctuate, which could affect our revenues and margins in the future;may be affected by a number of factors;
our expectation that our traffic acquisition costs will increase in the future;
our expectation that our results will be impacted by our performance in international markets as users in developing economies increasingly come online;
our expectation that the portion•estimates of our revenues that we derive from non-advertising revenues will continue to increase;future compensation expenses;
•our expectation that our other income (loss)(expense), net (OI&E), will fluctuate in the future, as it is largely driven by market dynamics;
estimates of our future compensation expenses;
•fluctuations in our effective tax rate;
•seasonal fluctuations in internet usage and advertiser expenditures, underlying business trends such as traditional retail seasonality, which are likely to cause fluctuations in our quarterly results;
•the sufficiency of our sources of funding;
•our payment termspotential exposure in connection with new and pending investigations, proceedings, and other contingencies;
•the sufficiency and timing of our proposed remedies in response to certain advertisers, which may increase our working capital requirements;decisions from the European Commission (EC) and other regulators and governmental entities;
fluctuations in our capital expenditures;
our expectations related to the operating structure implemented pursuant to the Alphabet holding company reorganization;
•the expected timing, amount, and amounteffect of Alphabet Inc.'s stockshare repurchases;
•our long-term sustainability and diversity goals;
•the unpredictability of the ongoing broader economic effects resulting from the war in Ukraine on our future financial results;
as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may appear throughout this report and other documents we file with the Securities and Exchange Commission (SEC), including without limitation, the following sections: Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors"“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as may be updated2021, and including material changes reflected in our subsequentthis Quarterly ReportsReport on Form 10-Q. Forward-looking statements generally can be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "will be," "will continue," "may," "could," "will likely result," and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2021, and including material changes reflected in this Quarterly Report on Form 10-Q, and those discussed in other documents we file with the SEC. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
As used herein, "Alphabet," "the company," "we," "us," "our," and similar terms include Alphabet Inc. and its subsidiaries, unless the context indicates otherwise.
"Alphabet," "Google," and other trademarks of ours appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies' trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.
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PART I. | FINANCIAL INFORMATIONAlphabet Inc. |
PART I. FINANCIAL INFORMATION | |
ITEM 1. | FINANCIAL STATEMENTS |
ITEM 1.FINANCIAL STATEMENTS Alphabet Inc.
CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts which are reflected in thousands,
and par value per share amounts)
|
| | | | | | | |
| | As of
December 31, 2016 | | As of
September 30, 2017 |
| | | | (unaudited) |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 12,918 |
| | $ | 10,581 |
|
| Marketable securities | 73,415 |
| | 89,562 |
|
| Total cash, cash equivalents, and marketable securities | 86,333 |
| | 100,143 |
|
| Accounts receivable, net of allowance of $467 and $625 | 14,137 |
| | 15,295 |
|
| Income taxes receivable, net | 95 |
| | 282 |
|
| Inventory | 268 |
| | 765 |
|
| Other current assets | 4,575 |
| | 2,860 |
|
| Total current assets | 105,408 |
| | 119,345 |
|
| Non-marketable investments | 5,878 |
| | 7,269 |
|
| Deferred income taxes | 383 |
| | 505 |
|
| Property and equipment, net | 34,234 |
| | 40,120 |
|
| Intangible assets, net | 3,307 |
| | 2,883 |
|
| Goodwill | 16,468 |
| | 16,731 |
|
| Other non-current assets | 1,819 |
| | 2,683 |
|
| Total assets | $ | 167,497 |
| | $ | 189,536 |
|
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 2,041 |
| | $ | 2,674 |
|
| Accrued compensation and benefits | 3,976 |
| | 4,022 |
|
| Accrued expenses and other current liabilities | 6,144 |
| | 9,307 |
|
| Accrued revenue share | 2,942 |
| | 3,200 |
|
| Deferred revenue | 1,099 |
| | 1,269 |
|
| Income taxes payable, net | 554 |
| | 221 |
|
| Total current liabilities | 16,756 |
| | 20,693 |
|
| Long-term debt | 3,935 |
| | 3,964 |
|
| Deferred revenue, non-current | 202 |
| | 346 |
|
| Income taxes payable, non-current | 4,677 |
| | 4,358 |
|
| Deferred income taxes | 226 |
| | 151 |
|
| Other long-term liabilities | 2,665 |
| | 2,924 |
|
| Total liabilities | 28,461 |
| | 32,436 |
|
| Commitments and Contingencies (Note 11) |
| |
|
| Stockholders’ equity: | | | |
| Convertible preferred stock, $0.001 par value per share, 100,000 shares authorized; no shares issued and outstanding | 0 |
| | 0 |
|
| Class A and Class B common stock, and Class C capital stock and additional paid-in capital, $0.001 par value per share: 15,000,000 shares authorized (Class A 9,000,000, Class B 3,000,000, Class C 3,000,000); 691,293 (Class A 296,992, Class B 47,437, Class C 346,864) and 694,790 (Class A 298,263, Class B 47,054, Class C 349,473) shares issued and outstanding | 36,307 |
| | 39,609 |
|
| Accumulated other comprehensive loss | (2,402 | ) | | (746 | ) |
| Retained earnings | 105,131 |
| | 118,237 |
|
| Total stockholders’ equity | 139,036 |
| | 157,100 |
|
| Total liabilities and stockholders’ equity | $ | 167,497 |
| | $ | 189,536 |
|
| | | | | | | | | | | |
| As of
December 31, 2021 | | As of
September 30, 2022 |
| | | (unaudited) |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 20,945 | | | $ | 21,984 | |
| Marketable securities | 118,704 | | | 94,275 | |
| Total cash, cash equivalents, and marketable securities | 139,649 | | | 116,259 | |
| Accounts receivable, net | 39,304 | | | 34,697 | |
| Income taxes receivable, net | 966 | | | 1,479 | |
| Inventory | 1,170 | | | 3,156 | |
| Other current assets | 7,054 | | | 10,518 | |
| Total current assets | 188,143 | | | 166,109 | |
| Non-marketable securities | 29,549 | | | 30,419 | |
| Deferred income taxes | 1,284 | | | 2,991 | |
| Property and equipment, net | 97,599 | | | 108,363 | |
| Operating lease assets | 12,959 | | | 13,677 | |
| Intangible assets, net | 1,417 | | | 2,192 | |
| Goodwill | 22,956 | | | 28,834 | |
| Other non-current assets | 5,361 | | | 5,670 | |
| Total assets | $ | 359,268 | | | $ | 358,255 | |
| Liabilities and Stockholders’ Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 6,037 | | | $ | 6,303 | |
| | | |
| Accrued compensation and benefits | 13,889 | | | 12,366 | |
| Accrued expenses and other current liabilities | 31,236 | | | 35,038 | |
| Accrued revenue share | 8,996 | | | 7,662 | |
| Deferred revenue | 3,288 | | | 3,585 | |
| Income taxes payable, net | 808 | | | 1,025 | |
| Total current liabilities | 64,254 | | | 65,979 | |
| Long-term debt | 14,817 | | | 14,653 | |
| Deferred revenue, non-current | 535 | | | 594 | |
| Income taxes payable, non-current | 9,176 | | | 8,572 | |
| Deferred income taxes | 5,257 | | | 476 | |
| Operating lease liabilities | 11,389 | | | 11,984 | |
| Other long-term liabilities | 2,205 | | | 2,371 | |
| Total liabilities | 107,633 | | | 104,629 | |
| Contingencies (Note 9) | | | |
| Stockholders’ equity: | | | |
| Preferred stock, $0.001 par value per share, 100 shares authorized; no shares issued and outstanding | 0 | | | 0 | |
| Class A, Class B, and Class C stock and additional paid-in capital, $0.001 par value per share: 300,000 shares authorized (Class A 180,000, Class B 60,000, Class C 60,000); 13,242 (Class A 6,015, Class B 893, Class C 6,334) and 12,971 (Class A 5,978, Class B 884, Class C 6,109) shares issued and outstanding | 61,774 | | | 66,258 | |
| Accumulated other comprehensive income (loss) | (1,623) | | | (8,852) | |
| Retained earnings | 191,484 | | | 196,220 | |
| Total stockholders’ equity | 251,635 | | | 253,626 | |
| Total liabilities and stockholders’ equity | $ | 359,268 | | | $ | 358,255 | |
See accompanying notes.
Alphabet Inc.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts; unaudited)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Revenues | $ | 22,451 |
| | $ | 27,772 |
| | $ | 64,208 |
| | $ | 78,532 |
|
| Costs and expenses: | | | | | | | |
| Cost of revenues | 8,699 |
| | 11,148 |
| | 24,477 |
| | 31,316 |
|
| Research and development | 3,596 |
| | 4,205 |
| | 10,326 |
| | 12,319 |
|
| Sales and marketing | 2,565 |
| | 3,042 |
| | 7,367 |
| | 8,583 |
|
| General and administrative | 1,824 |
| | 1,595 |
| | 4,961 |
| | 5,096 |
|
| European Commission fine | 0 |
| | 0 |
| | 0 |
| | 2,736 |
|
| Total costs and expenses | 16,684 |
| | 19,990 |
| | 47,131 |
| | 60,050 |
|
| Income from operations | 5,767 |
| | 7,782 |
| | 17,077 |
| | 18,482 |
|
| Other income (expense), net | 278 |
| | 197 |
| | 216 |
| | 693 |
|
| Income before income taxes | 6,045 |
| | 7,979 |
| | 17,293 |
| | 19,175 |
|
| Provision for income taxes | 984 |
| | 1,247 |
| | 3,148 |
| | 3,493 |
|
| Net income | $ | 5,061 |
| | $ | 6,732 |
| | $ | 14,145 |
| | $ | 15,682 |
|
| | | | | | | | |
| Basic net income per share of Class A and B common stock and Class C capital stock | $ | 7.36 |
| | $ | 9.71 |
| | $ | 20.59 |
| | $ | 22.65 |
|
| Diluted net income per share of Class A and B common stock and Class C capital stock | $ | 7.25 |
| | $ | 9.57 |
| | $ | 20.26 |
| | $ | 22.30 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
| Revenues | $ | 65,118 | | | $ | 69,092 | | | $ | 182,312 | | | $ | 206,788 | |
| Costs and expenses: | | | | | | | |
| Cost of revenues | 27,621 | | | 31,158 | | | 77,951 | | | 90,861 | |
| Research and development | 7,694 | | | 10,273 | | | 22,854 | | | 29,233 | |
| Sales and marketing | 5,516 | | | 6,929 | | | 15,308 | | | 19,384 | |
| General and administrative | 3,256 | | | 3,597 | | | 9,370 | | | 10,628 | |
| Total costs and expenses | 44,087 | | | 51,957 | | | 125,483 | | | 150,106 | |
| Income from operations | 21,031 | | | 17,135 | | | 56,829 | | | 56,682 | |
| Other income (expense), net | 2,033 | | | (902) | | | 9,503 | | | (2,501) | |
| Income before income taxes | 23,064 | | | 16,233 | | | 66,332 | | | 54,181 | |
| Provision for income taxes | 4,128 | | | 2,323 | | | 10,941 | | | 7,833 | |
| Net income | $ | 18,936 | | | $ | 13,910 | | | $ | 55,391 | | | $ | 46,348 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Basic net income per share of Class A, Class B, and Class C stock | $ | 1.42 | | | $ | 1.07 | | | $ | 4.14 | | | $ | 3.53 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Diluted net income per share of Class A, Class B, and Class C stock | $ | 1.40 | | | $ | 1.06 | | | $ | 4.08 | | | $ | 3.50 | |
See accompanying notes.
Alphabet Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions; unaudited)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Net income | $ | 5,061 |
| | $ | 6,732 |
| | $ | 14,145 |
| | $ | 15,682 |
|
| Other comprehensive income: | | | | | | | |
| Change in foreign currency translation adjustment | 129 |
| | 441 |
| | 166 |
| | 1,457 |
|
| Available-for-sale investments: | | | | | | | |
| Change in net unrealized gains (losses) | 71 |
| | 578 |
| | 627 |
| | 803 |
|
| Less: reclassification adjustment for net (gains) losses included in net income | (46 | ) | | 47 |
| | 137 |
| | 98 |
|
| Net change (net of tax effect of $7, $0, $191, and $0) | 25 |
| | 625 |
| | 764 |
| | 901 |
|
| Cash flow hedges: | | | | | | | |
| Change in net unrealized gains (losses) | 32 |
| | (209 | ) | | 148 |
| | (668 | ) |
| Less: reclassification adjustment for net (gains) losses included in net income | (67 | ) | | 125 |
| | (236 | ) | | (34 | ) |
| Net change (net of tax effect of $20, $50, $29, and $342) | (35 | ) | | (84 | ) | | (88 | ) | | (702 | ) |
| Other comprehensive income | 119 |
| | 982 |
| | 842 |
| | 1,656 |
|
| Comprehensive income | $ | 5,180 |
| | $ | 7,714 |
| | $ | 14,987 |
| | $ | 17,338 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2021 | | 2022 | | 2021 | | 2022 |
| Net income | $ | 18,936 | | | $ | 13,910 | | | $ | 55,391 | | | $ | 46,348 | |
| Other comprehensive loss: | | | | | | | |
| Change in foreign currency translation adjustment | (614) | | | (2,175) | | | (671) | | | (3,801) | |
| Available-for-sale investments: | | | | | | | |
| Change in net unrealized gains (losses) | (159) | | | (1,800) | | | (699) | | | (5,204) | |
| Less: reclassification adjustment for net (gains) losses included in net income | (57) | | | 362 | | | (121) | | | 743 | |
| Net change, net of income tax benefit (expense) of $63, $409, $235 and $1,269 | (216) | | | (1,438) | | | (820) | | | (4,461) | |
| Cash flow hedges: | | | | | | | |
| Change in net unrealized gains (losses) | 292 | | | 1,136 | | | 429 | | | 2,165 | |
| Less: reclassification adjustment for net (gains) losses included in net income | (60) | | | (547) | | | 21 | | | (1,132) | |
| Net change, net of income tax benefit (expense) of $(54), $(159), $(89) and $(228) | 232 | | | 589 | | | 450 | | | 1,033 | |
| Other comprehensive loss | (598) | | | (3,024) | | | (1,041) | | | (7,229) | |
| Comprehensive income | $ | 18,338 | | | $ | 10,886 | | | $ | 54,350 | | | $ | 39,119 | |
See accompanying notes.
Alphabet Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions; unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 |
| | Class A, Class B, Class C Stock and Additional Paid-In Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Retained
Earnings | | Total
Stockholders’
Equity |
| | Shares | | Amount | |
| Balance as of June 30, 2021 | 13,353 | | | $ | 60,436 | | | $ | 190 | | | $ | 176,939 | | | $ | 237,565 | |
| Stock issued | 33 | | | 1 | | | 0 | | | 0 | | | 1 | |
| Stock-based compensation expense | 0 | | | 3,914 | | | 0 | | | 0 | | | 3,914 | |
| Tax withholding related to vesting of restricted stock units and other | 0 | | | (2,641) | | | 0 | | | 0 | | | (2,641) | |
| Repurchases of stock | (92) | | | (517) | | | 0 | | | (12,093) | | | (12,610) | |
| Sale of interest in consolidated entities | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Net income | 0 | | | 0 | | | 0 | | | 18,936 | | | 18,936 | |
| Other comprehensive income (loss) | 0 | | | 0 | | | (598) | | | 0 | | | (598) | |
| Balance as of September 30, 2021 | 13,294 | | | $ | 61,193 | | | $ | (408) | | | $ | 183,782 | | | $ | 244,567 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2021 |
| | Class A, Class B, Class C Stock and Additional Paid-In Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Retained
Earnings | | Total
Stockholders’
Equity |
| | Shares | | Amount | |
| Balance as of December 31, 2020 | 13,504 | | | $ | 58,510 | | | $ | 633 | | | $ | 163,401 | | | $ | 222,544 | |
| Stock issued | 103 | | | 8 | | | 0 | | | 0 | | | 8 | |
| Stock-based compensation expense | 0 | | | 11,546 | | | 0 | | | 0 | | | 11,546 | |
| Tax withholding related to vesting of restricted stock units and other | 0 | | | (7,390) | | | 0 | | | 0 | | | (7,390) | |
| Repurchases of stock | (313) | | | (1,791) | | | 0 | | | (35,010) | | | (36,801) | |
| Sale of interest in consolidated entities | 0 | | | 310 | | | 0 | | | 0 | | | 310 | |
| Net income | 0 | | | 0 | | | 0 | | | 55,391 | | | 55,391 | |
| Other comprehensive income (loss) | 0 | | | 0 | | | (1,041) | | | 0 | | | (1,041) | |
| Balance as of September 30, 2021 | 13,294 | | | $ | 61,193 | | | $ | (408) | | | $ | 183,782 | | | $ | 244,567 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 |
| | Class A, Class B, Class C Stock and Additional Paid-In Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Retained
Earnings | | Total
Stockholders’
Equity |
| | Shares | | Amount | |
| Balance as of June 30, 2022 | 13,078 | | | $ | 64,402 | | | $ | (5,828) | | | $ | 196,845 | | | $ | 255,419 | |
| Stock issued | 31 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Stock-based compensation expense | 0 | | | 5,018 | | | 0 | | | 0 | | | 5,018 | |
| Tax withholding related to vesting of restricted stock units and other | 0 | | | (2,315) | | | 0 | | | 0 | | | (2,315) | |
| Repurchases of stock | (138) | | | (857) | | | 0 | | | (14,535) | | | (15,392) | |
| Sale of interest in consolidated entities | 0 | | | 10 | | | 0 | | | 0 | | | 10 | |
| Net income | 0 | | | 0 | | | 0 | | | 13,910 | | | 13,910 | |
| Other comprehensive income (loss) | 0 | | | 0 | | | (3,024) | | | 0 | | | (3,024) | |
| Balance as of September 30, 2022 | 12,971 | | | $ | 66,258 | | | $ | (8,852) | | | $ | 196,220 | | | $ | 253,626 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2022 |
| | Class A, Class B, Class C Stock and Additional Paid-In Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Retained
Earnings | | Total
Stockholders’
Equity |
| | Shares | | Amount | |
| Balance as of December 31, 2021 | 13,242 | | | $ | 61,774 | | | $ | (1,623) | | | $ | 191,484 | | | $ | 251,635 | |
| Stock issued | 98 | | | 8 | | | 0 | | | 0 | | | 8 | |
| Stock-based compensation expense | 0 | | | 14,388 | | | 0 | | | 0 | | | 14,388 | |
| Tax withholding related to vesting of restricted stock units and other | 0 | | | (7,644) | | | 0 | | | (1) | | | (7,645) | |
| Repurchases of stock | (369) | | | (2,278) | | | 0 | | | (41,611) | | | (43,889) | |
| Sale of interest in consolidated entities | 0 | | | 10 | | | 0 | | | 0 | | | 10 | |
| Net income | 0 | | | 0 | | | 0 | | | 46,348 | | | 46,348 | |
| Other comprehensive income (loss) | 0 | | | 0 | | | (7,229) | | | 0 | | | (7,229) | |
| Balance as of September 30, 2022 | 12,971 | | | $ | 66,258 | | | $ | (8,852) | | | $ | 196,220 | | | $ | 253,626 | |
See accompanying notes.
Alphabet Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions; unaudited)
|
| | | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2016 | | 2017 |
| Operating activities | | | |
| Net income | $ | 14,145 |
| | $ | 15,682 |
|
| Adjustments: | | | |
| Depreciation and impairment of property and equipment | 3,803 |
| | 4,272 |
|
| Amortization and impairment of intangible assets | 654 |
| | 617 |
|
| Stock-based compensation expense | 4,857 |
| | 5,832 |
|
| Deferred income taxes | 119 |
| | 242 |
|
| Loss on marketable and non-marketable investments, net | 204 |
| | 160 |
|
| Other | 117 |
| | 99 |
|
| Changes in assets and liabilities, net of effects of acquisitions: | | | |
| Accounts receivable | (299 | ) | | (719 | ) |
| Income taxes, net | 2,153 |
| | (865 | ) |
| Other assets | 114 |
| | (2,086 | ) |
| Accounts payable | 238 |
| | 58 |
|
| Accrued expenses and other liabilities | 338 |
| | 3,121 |
|
| Accrued revenue share | 138 |
| | 182 |
|
| Deferred revenue | 42 |
| | 228 |
|
| Net cash provided by operating activities | 26,623 |
| | 26,823 |
|
| Investing activities | | | |
| Purchases of property and equipment | (7,134 | ) | | (8,877 | ) |
| Proceeds from disposals of property and equipment | 226 |
| | 81 |
|
| Purchases of marketable securities | (70,959 | ) | | (78,709 | ) |
| Maturities and sales of marketable securities | 54,379 |
| | 62,588 |
|
| Purchases of non-marketable investments | (862 | ) | | (871 | ) |
| Maturities and sales of non-marketable investments | 189 |
| | 215 |
|
| Cash collateral related to securities lending | (2,428 | ) | | 0 |
|
| Investments in reverse repurchase agreements | 450 |
| | 0 |
|
| Acquisitions, net of cash acquired, and purchases of intangible assets | (324 | ) | | (273 | ) |
| Proceeds from collection of notes receivable | 0 |
| | 1,419 |
|
| Net cash used in investing activities | (26,463 | ) | | (24,427 | ) |
| Financing activities | | | |
| Net payments related to stock-based award activities | (2,425 | ) | | (3,111 | ) |
| Repurchases of capital stock | (3,693 | ) | | (2,745 | ) |
| Proceeds from issuance of debt, net of costs | 8,729 |
| | 2,698 |
|
| Repayments of debt | (10,051 | ) | | (2,762 | ) |
| Proceeds from sale of subsidiary shares | 0 |
| | 800 |
|
| Net cash used in financing activities | (7,440 | ) | | (5,120 | ) |
| Effect of exchange rate changes on cash and cash equivalents | 137 |
| | 387 |
|
| Net decrease in cash and cash equivalents | (7,143 | ) | | (2,337 | ) |
| Cash and cash equivalents at beginning of period | 16,549 |
| | 12,918 |
|
| Cash and cash equivalents at end of period | $ | 9,406 |
| | $ | 10,581 |
|
| | | | | | | | | | | |
| Nine Months Ended |
| September 30, |
| 2021 | | 2022 |
| Operating activities | | | |
| Net income | $ | 55,391 | | | $ | 46,348 | |
| Adjustments: | | | |
| Depreciation and impairment of property and equipment | 8,340 | | | 11,222 | |
| Amortization and impairment of intangible assets | 662 | | | 505 | |
| Stock-based compensation expense | 11,422 | | | 14,262 | |
| Deferred income taxes | 192 | | | (6,157) | |
| (Gain) loss on debt and equity securities, net | (9,792) | | | 3,856 | |
| Other | (199) | | | 369 | |
| Changes in assets and liabilities, net of effects of acquisitions: | | | |
| Accounts receivable | (3,276) | | | 2,298 | |
| Income taxes, net | 2,744 | | | (862) | |
| Other assets | (1,447) | | | (4,268) | |
| Accounts payable | (874) | | | 735 | |
| Accrued expenses and other liabilities | 2,763 | | | 491 | |
| Accrued revenue share | 386 | | | (1,022) | |
| Deferred revenue | 406 | | | 104 | |
| Net cash provided by operating activities | 66,718 | | | 67,881 | |
| Investing activities | | | |
| Purchases of property and equipment | (18,257) | | | (23,890) | |
| Purchases of marketable securities | (95,106) | | | (67,253) | |
| Maturities and sales of marketable securities | 92,126 | | | 84,087 | |
| Purchases of non-marketable securities | (2,068) | | | (1,628) | |
| Maturities and sales of non-marketable securities | 590 | | | 131 | |
| | | |
| | | |
| Acquisitions, net of cash acquired, and purchases of intangible assets | (2,233) | | | (6,885) | |
| Other investing activities | 441 | | | 1,367 | |
| | | |
| Net cash used in investing activities | (24,507) | | | (14,071) | |
| Financing activities | | | |
| Net payments related to stock-based award activities | (7,239) | | | (7,221) | |
| | | |
| Repurchases of stock | (36,801) | | | (43,889) | |
| Proceeds from issuance of debt, net of costs | 13,949 | | | 44,322 | |
| Repayments of debt | (15,070) | | | (45,350) | |
| Proceeds from sale of interest in consolidated entities, net | 310 | | | 10 | |
| Net cash used in financing activities | (44,851) | | | (52,128) | |
| Effect of exchange rate changes on cash and cash equivalents | (106) | | | (643) | |
| Net increase (decrease) in cash and cash equivalents | (2,746) | | | 1,039 | |
| Cash and cash equivalents at beginning of period | 26,465 | | | 20,945 | |
| Cash and cash equivalents at end of period | $ | 23,719 | | | $ | 21,984 | |
| | | |
| | | |
| | | |
| | | |
See accompanying notes.
Alphabet Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Google Inc. (Google) was incorporated in California in September 1998 and re-incorporated in the State of Delaware in August 2003. In 2015, we implemented a holding company reorganization, and as a result, Alphabet Inc. (Alphabet)("Alphabet") became the successor issuer to Google.
We generate revenues primarily by delivering relevant, cost-effective online advertising.advertising; cloud-based solutions that provide customers with infrastructure and platform services and collaboration tools; sales of other products and services, such as apps and in-app purchases, digital content products, and hardware; and fees received for subscription-based products such as YouTube Premium and YouTube TV.
Basis of Consolidation
The consolidated financial statements of Alphabet include the accounts of Alphabet and all wholly-owned subsidiaries as well as allentities consolidated under the variable interest entities where we are the primary beneficiary.and voting models. All intercompany balances and transactions have been eliminated.
Unaudited Interim Financial Information
The accompanying Consolidated Balance Sheet as of September 30, 2017, the Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2017, the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2017, and the Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2017 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (GAAP). In, and in our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of September 30, 2017, ourstatement presentation. Interim results of operations for the three and nine months ended September 30, 2016 and 2017, and our cash flows for the nine months ended September 30, 2016 and 2017. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.
These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on February 2, 2017.
Use of Estimates
Preparation of the consolidated financial statements in conformity with GAAP requires us to make2022. We have made estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable and sales allowances, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, and contingent liabilities, among others. We base our estimates on assumptions, both historical and forward looking, that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Fair Value of Financial Instruments
Our financial assets and financial liabilities including cash equivalents, marketable securities, foreign currency and interest rate derivative contracts, and non-marketable debt securities are measured and recorded at fair value on a recurring basis. We measure certain financial assets at fair value for disclosure purposes, as well as on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. Our other current financial assets and our other current financial liabilities have fair values that approximate their carrying values.
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques
for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings.
Level 3 - Unobservable inputs that are supported by little or no market activities.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-01 (ASU 2016-01) "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for annual reporting periods and interim periods within those years beginning after December 15, 2017. The most significant impact to ourThese consolidated financial statements relates toand other information presented in this Form 10-Q should be read in conjunction with the recognition and measurement of equity investments at fair value in our consolidated statement of income. We expect to elect the measurement alternative, defined as cost, less impairments, adjusted by observable price changes. We anticipate that the adoption of ASU 2016-01 will increase the volatility of our other income (expense), net, as a result of the remeasurement of our equity securities upon the occurrence of observable price changes and impairments.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (Topic 842) "Leases." Topic 842 supersedes the lease recognition requirements in Accounting Standards Codification (ASC) Topic 840, "Leases." Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating. Topic 842 is effective for annual reporting periods and interim periods within those years beginning after December 15, 2018. Early adoption by public entities is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements and there are certain optional practical expedients that an entity may elect to apply. Full retrospective application is prohibited. We anticipatethe related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC.
Stock Split Effected in the Form of a Stock Dividend (“Stock Split”)
On February 1, 2022, the company announced that the adoptionBoard of Topic 842 will materially affect our Consolidated Balance Sheets. We areDirectors had approved and declared a 20-for-one stock split in the processform of implementing changes to our systems and processes in conjunction with our review of existing lease agreements. We plan to adopt Topic 842 effective January 1, 2019 and we are evaluating the usea one-time special stock dividend on each share of the optional practical expedients.
In June 2016,company’s Class A, Class B, and Class C stock. The Stock Split had a record date of July 1, 2022 and an effective date of July 15, 2022. The par value per share of our Class A, Class B, and Class C stock remains unchanged at $0.001 per share after the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2019. We are currentlyStock Split. All prior period references made to share or per share amounts in the process of evaluatingaccompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the impacteffects of the adoption of ASU 2016-13 on our consolidated financial statements.Stock Split.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16 (ASU 2016-16) "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory." ASU 2016-16 generally accelerates the recognition of income tax consequences for asset transfers between entities under common control. ASU 2016-16 is effective for annual reporting periods and interim periods within those years beginning after December 15, 2017. Entities are required to adopt using a modified retrospective approach with a cumulative adjustment to retained earnings for previously unrecognized income tax expense. We anticipate a retained earnings adjustment of $600 million to $800 million upon adoption related to the unrecognized income tax effects of asset transfers that occurred prior to adoption.In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (ASU 2017-04) “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04 is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019; early adoption is permitted. We currently anticipate that the adoption of ASU 2017-04 will not have a material impact on our consolidated financial statements.
Recently adopted accounting pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) "Revenue from Contracts with Customers." Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. We adopted Topic 606 as of January 1, 2017 using the modified retrospective transition method. See Note 2 for further details.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01 (ASU 2017-01) “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 provides guidance to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group of similar assets, the assets acquired (or disposed of) are not considered a business. We adopted ASU 2017-01 as of January 1, 2017 on a prospective basis.
Prior Period Reclassifications
Certain amounts in prior periods have been reclassified to conform with current period presentation.
Note 2. Revenues
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"Disaggregated Revenues
On January 1, 2017, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2017. Results for reporting periods beginning after January 1, 2017 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
We recorded a net reduction to opening retained earnings of $15 million as of January 1, 2017 due to the cumulative impact of adopting Topic 606, with the impact primarily related to our non-advertising revenues. The impact to revenues as a result of applying Topic 606 was an increase of $10 million and $32 million for the three and nine months ended September 30, 2017, respectively.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The following table presents our revenues disaggregated by revenue sourcetype (in millions, unaudited). Sales and usage-based taxes are excluded from revenues.millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
| Google Search & other | $ | 37,926 | | | $ | 39,539 | | | $ | 105,650 | | | $ | 119,846 | |
| YouTube ads | 7,205 | | | 7,071 | | | 20,212 | | | 21,280 | |
| Google Network | 7,999 | | | 7,872 | | | 22,396 | | | 24,305 | |
| Google advertising | 53,130 | | | 54,482 | | | 148,258 | | | 165,431 | |
| Google other | 6,754 | | | 6,895 | | | 19,871 | | | 20,259 | |
| Google Services total | 59,884 | | | 61,377 | | | 168,129 | | | 185,690 | |
| Google Cloud | 4,990 | | | 6,868 | | | 13,665 | | | 18,965 | |
| Other Bets | 182 | | | 209 | | | 572 | | | 842 | |
| Hedging gains (losses) | 62 | | | 638 | | | (54) | | | 1,291 | |
| Total revenues | $ | 65,118 | | | $ | 69,092 | | | $ | 182,312 | | | $ | 206,788 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016(1) | | 2017 | | 2016(1) | | 2017 |
| Google properties | $ | 16,089 |
| | $ | 19,723 |
| | $ | 45,817 |
| | $ | 55,551 |
|
| Google Network Members' properties | 3,732 |
| | 4,342 |
| | 11,167 |
| | 12,597 |
|
| Google advertising revenues | 19,821 |
| | 24,065 |
| | 56,984 |
| | 68,148 |
|
| Google other revenues | 2,433 |
| | 3,405 |
| | 6,677 |
| | 9,590 |
|
| Other Bets revenues | 197 |
| | 302 |
| | 547 |
| | 794 |
|
Total revenues(2) | $ | 22,451 |
| | $ | 27,772 |
| | $ | 64,208 |
| | $ | 78,532 |
|
| |
(1)
| As noted above, prior period amounts have not been adjusted under the modified retrospective method. |
| |
(2)
| Revenues include hedging gains (losses) of $105 million and $(191) million for the three months ended September 30, 2016 and 2017, respectively, and $352 million and $29 million for the nine months ended September 30, 2016 and 2017, respectively, which do not represent revenues recognized from contracts with customers. |
The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers (in millions, unaudited)millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| | 2021 | | 2022 | | 2021 | | 2022 |
| United States | $ | 29,824 | | | 46 | % | | $ | 33,372 | | | 48 | % | | $ | 83,064 | | | 46 | % | | $ | 97,832 | | | 47 | % |
EMEA(1) | 19,839 | | | 30 | | | 19,450 | | | 28 | | | 55,954 | | | 31 | | | 60,300 | | | 29 | |
APAC(1) | 11,705 | | | 18 | | | 11,494 | | | 17 | | | 33,391 | | | 18 | | | 35,045 | | | 17 | |
Other Americas(1) | 3,688 | | | 6 | | | 4,138 | | | 6 | | | 9,957 | | | 5 | | | 12,320 | | | 6 | |
| Hedging gains (losses) | 62 | | | 0 | | | 638 | | | 1 | | | (54) | | | 0 | | | 1,291 | | | 1 | |
| Total revenues | $ | 65,118 | | | 100 | % | | $ | 69,092 | | | 100 | % | | $ | 182,312 | | | 100 | % | | $ | 206,788 | | | 100 | % |
(1) Regions represent Europe, the Middle East, and Africa (EMEA); Asia-Pacific (APAC); and Canada and Latin America ("Other Americas"). |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| United States | $ | 10,649 |
| | $ | 12,930 |
| | $ | 30,065 |
| | $ | 37,021 |
|
EMEA(1) | 7,392 |
| | 9,097 |
| | 22,007 |
| | 25,733 |
|
APAC(1) | 3,248 |
| | 4,199 |
| | 8,951 |
| | 11,548 |
|
Other Americas(1) | 1,162 |
| | 1,546 |
| | 3,185 |
| | 4,230 |
|
Total revenues(2) | $ | 22,451 |
| | $ | 27,772 |
| | $ | 64,208 |
| | $ | 78,532 |
|
| |
(1)
| Regions represent Europe, the Middle East, and Africa (EMEA); Asia-Pacific (APAC); and Canada and Latin America (Other Americas). |
| |
(2)
| Revenues include hedging gains (losses) for the three and nine months ended September 30, 2016 and 2017. |
AdvertisingRevenue Backlog and Deferred Revenues
We generateAs of September 30, 2022, we had $52.4 billion of remaining performance obligations (“revenue backlog”), primarily related to Google Cloud, and expect to recognize approximately half of this amount as revenues primarilyover the next 24 months with the remaining to be recognized thereafter. Our revenue backlog represents commitments in customer contracts for future services that have not yet been recognized as revenues. The amount and timing of revenue recognition for these commitments is largely driven by delivering advertising on Google properties and Google Network Members’ properties.
Google properties revenues consist primarily of advertising revenues generated on Google.com, the Google app, YouTube, and other Google owned and operated properties like Gmail, Google Maps, and Google Play.
Google Network Members’ properties revenues consist primarily of advertising revenues generated from placing ads on Google Network Members’ properties.
Our customers generally purchase advertising inventory through AdWords, DoubleClick Bid Manager, and DoubleClick AdExchange, among others.
Most ofwhen our customers pay us on a cost-per-click basis (CPC),utilize services and our ability to deliver in accordance with relevant contract terms, which means that an advertiser pays us onlycould affect our estimate of revenue backlog and when a user clicks on an ad on Google properties or Google Network Members' properties or views certain YouTube ad formats like TrueView. For these customers, we expect to recognize revenue each time a user clicks on the ad or when a user views the ad for a specified period of time.
We also offer advertising on other bases such as cost-per-impression (CPM), which means an advertiser pays us based on the number of times their ads are displayed on Google properties or Google Network Members’ properties. For these customers, we recognizerevenues. Revenue backlog includes related deferred revenue each time an ad is displayed.
Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration.
For ads placed on Google Network Members’ properties, we evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis). Generally, we report advertising revenues for ads placed on Google Network Members’ properties on a gross basis, that is, the amounts billed to our customers arecurrently recorded as revenues,well as amounts that will be invoiced in future periods and amounts paid to Google Network Members are recorded as cost of revenues. Where we are the principal, we control the advertising inventory before it is transferred to our customers. Our control is evidenced by our sole ability to monetize the advertising inventory before it is transferred to our customers, and is further supported by us being primarily responsible to our customers and having a level of discretion in establishing pricing.
Other Revenues
Google other revenues and Other Bets revenues consist primarily of revenues from:
Apps, in-app purchases, and digital content in the Google Play store;
Google Cloud offerings;
Hardware; and
Other miscellaneous products and services.
As it relates to Google other revenues, the most significant judgment is determining whether we are the principal or agent for app sales and in-app purchases through the Google Play store. We report revenues from these transactions on a net basis because our performance obligation is to facilitate a transaction between app developers and end users,
for which we earn a commission. Consequently, the portion of the gross amount billed to end users that is remitted to app developers is not reflected as revenues.
Arrangements with Multiple Performance Obligations
Ourexcludes contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customersan original expected term of one year or using expected cost plus margin.
Deferred Revenuesless and cancellable contracts.
We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The increase in theDeferred revenues primarily relate to Google Cloud and Google other. Total deferred revenue balance foras of December 31, 2021 was $3.8 billion, of which $2.4 billion was recognized as revenues during the nine months ended September 30, 2017 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $779 million of revenues recognized that were included in the deferred revenue balance as of December 31, 2016.2022.
Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Note 3. Financial Instruments
Debt Securities
We classify our cash equivalents and marketable debt securities, which are accounted for as available-for-sale, within Level 1 or Level 2 in the fair value hierarchy because we use quoted market prices to the extent available or alternative pricing sources and models utilizing market observable inputs to determine their fair value. We classify our foreign currency and interest rate derivative contracts primarily within Level 2 in
For certain marketable debt securities, we have elected the fair value hierarchyoption for which changes in fair value are recorded in other income (expense), net. The fair value option was elected for these securities to align with the unrealized gains and losses from related derivative contracts. Unrealized net losses related to debt securities still held where we have elected the fair value option were $35 million and $779 million as of December 31, 2021 and September 30, 2022, respectively. As of December 31, 2021 and September 30, 2022, the valuation inputs are based on quoted pricesfair value of these debt securities was $4.7 billion and market observable data of similar instruments.$6.6 billion, respectively.
Cash, Cash Equivalents, and Marketable Securities
The following tables summarize our cash, cash equivalents, and marketabledebt securities, for which we did not elect the fair value option, by significant investment categories as of December 31, 2016 and September 30, 2017 (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
| | Adjusted
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | | Cash and Cash
Equivalents | | Marketable
Securities |
| Level 2: | | | | | | | | | | | |
Time deposits(1) | $ | 5,133 | | | $ | 0 | | | $ | 0 | | | $ | 5,133 | | | $ | 5,133 | | | $ | 0 | |
| Government bonds | 53,288 | | | 258 | | | (238) | | | 53,308 | | | 5 | | | 53,303 | |
| Corporate debt securities | 35,605 | | | 194 | | | (223) | | | 35,576 | | | 12 | | | 35,564 | |
| Mortgage-backed and asset-backed securities | 18,829 | | | 96 | | | (112) | | | 18,813 | | | 0 | | | 18,813 | |
| Total | $ | 112,855 | | | $ | 548 | | | $ | (573) | | | $ | 112,830 | | | $ | 5,150 | | | $ | 107,680 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2022 |
| | Adjusted
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value | | Cash and Cash
Equivalents | | Marketable
Securities |
| Level 2: | | | | | | | | | | | |
Time deposits(1) | $ | 4,925 | | | $ | 0 | | | $ | 0 | | | $ | 4,925 | | | $ | 4,920 | | | $ | 5 | |
| Government bonds | 42,863 | | | 0 | | | (2,523) | | | 40,340 | | | 93 | | | 40,247 | |
| Corporate debt securities | 29,397 | | | 0 | | | (1,833) | | | 27,564 | | | 179 | | | 27,385 | |
| Mortgage-backed and asset-backed securities | 16,599 | | | 0 | | | (1,376) | | | 15,223 | | | 0 | | | 15,223 | |
| Total | $ | 93,784 | | | $ | 0 | | | $ | (5,732) | | | $ | 88,052 | | | $ | 5,192 | | | $ | 82,860 | |
(1)The majority of our time deposits are domestic deposits.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2016 |
| | Adjusted Cost | | Gross Unrealized Gains | | Gross
Unrealized
Losses | | Fair
Value | | Cash and Cash Equivalents | | Marketable
Securities |
| Cash | $ | 7,078 |
| | $ | 0 |
| | $ | 0 |
| | $ | 7,078 |
| | $ | 7,078 |
| | $ | 0 |
|
| Level 1: | | | | | | | | | | | |
| Money market and other funds | 4,783 |
| | 0 |
| | 0 |
| | 4,783 |
| | 4,783 |
| | 0 |
|
| U.S. government notes | 38,454 |
| | 46 |
| | (215 | ) | | 38,285 |
| | 613 |
| | 37,672 |
|
| Marketable equity securities | 160 |
| | 133 |
| | 0 |
| | 293 |
| | 0 |
| | 293 |
|
| | 43,397 |
| | 179 |
| | (215 | ) | | 43,361 |
| | 5,396 |
| | 37,965 |
|
| Level 2: | | | | | | | | | | | |
Time deposits(1) | 142 |
| | 0 |
| | 0 |
| | 142 |
| | 140 |
| | 2 |
|
Mutual funds(2) | 204 |
| | 7 |
| | 0 |
| | 211 |
| | 0 |
| | 211 |
|
| U.S. government agencies | 1,826 |
| | 0 |
| | (11 | ) | | 1,815 |
| | 300 |
| | 1,515 |
|
| Foreign government bonds | 2,345 |
| | 18 |
| | (7 | ) | | 2,356 |
| | 0 |
| | 2,356 |
|
| Municipal securities | 4,757 |
| | 15 |
| | (65 | ) | | 4,707 |
| | 2 |
| | 4,705 |
|
| Corporate debt securities | 12,993 |
| | 114 |
| | (116 | ) | | 12,991 |
| | 2 |
| | 12,989 |
|
| Agency mortgage-backed securities | 12,006 |
| | 26 |
| | (216 | ) | | 11,816 |
| | 0 |
| | 11,816 |
|
| Asset-backed securities | 1,855 |
| | 2 |
| | (1 | ) | | 1,856 |
| | 0 |
| | 1,856 |
|
| | 36,128 |
| | 182 |
| | (416 | ) | | 35,894 |
| | 444 |
| | 35,450 |
|
| Total | $ | 86,603 |
| | $ | 361 |
| | $ | (631 | ) | | $ | 86,333 |
| | $ | 12,918 |
| | $ | 73,415 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2017 |
| | Adjusted Cost | | Gross Unrealized Gains | | Gross
Unrealized
Losses | | Fair
Value | | Cash and Cash Equivalents | | Marketable
Securities |
| | (unaudited) |
| Cash | $ | 6,460 |
| | $ | 0 |
| | $ | 0 |
| | $ | 6,460 |
| | $ | 6,460 |
| | $ | 0 |
|
| Level 1: | | | | | | | | | | | |
| Money market and other funds | 1,450 |
| | 0 |
| | 0 |
| | 1,450 |
| | 1,450 |
| | 0 |
|
| U.S. government notes | 40,268 |
| | 12 |
| | (163 | ) | | 40,117 |
| | 919 |
| | 39,198 |
|
| Marketable equity securities | 226 |
| | 120 |
| | (2 | ) | | 344 |
| | 0 |
| | 344 |
|
| | 41,944 |
| | 132 |
| | (165 | ) | | 41,911 |
| | 2,369 |
| | 39,542 |
|
| Level 2: | | | | | | | | | | | |
Time deposits(1) | 145 |
| | 0 |
| | 0 |
| | 145 |
| | 143 |
| | 2 |
|
Mutual funds(2) | 233 |
| | 14 |
| | 0 |
| | 247 |
| | 0 |
| | 247 |
|
| U.S. government agencies | 2,841 |
| | 0 |
| | (9 | ) | | 2,832 |
| | 17 |
| | 2,815 |
|
| Foreign government bonds | 2,464 |
| | 8 |
| | (15 | ) | | 2,457 |
| | 0 |
| | 2,457 |
|
| Municipal securities | 6,774 |
| | 17 |
| | (10 | ) | | 6,781 |
| | 13 |
| | 6,768 |
|
| Corporate debt securities | 23,107 |
| | 49 |
| | (35 | ) | | 23,121 |
| | 1,579 |
| | 21,542 |
|
| Agency mortgage-backed securities | 10,984 |
| | 17 |
| | (76 | ) | | 10,925 |
| | 0 |
| | 10,925 |
|
| Asset-backed securities | 5,261 |
| | 7 |
| | (4 | ) | | 5,264 |
| | 0 |
| | 5,264 |
|
| | 51,809 |
| | 112 |
| | (149 | ) | | 51,772 |
| | 1,752 |
| | 50,020 |
|
| Total | $ | 100,213 |
| | $ | 244 |
| | $ | (314 | ) | | $ | 100,143 |
| | $ | 10,581 |
| | $ | 89,562 |
|
| |
(1)
| The majority of our time deposits are foreign deposits. |
| |
(2)
| The fair value option was elected for mutual funds with gains (losses) recognized in other income (expense), net. |
We determine realized gains or losses on the sale or extinguishment of marketabledebt securities on a specific identification method. We recognized gross realized gains of $62$109 million and $21$14 million for the three months ended September 30, 20162021 and 2017,2022, respectively, and $221$360 million and $193$83 million for the nine months ended September 30, 20162021 and 2017,2022, respectively. We recognized gross realized losses of $12$29 million and $65$551 million for the three months ended September 30, 20162021 and 2017,2022, respectively, and $347$180 million and $274 million$1.2 billion for the nine months ended September 30, 20162021 and 2017,2022, respectively. We reflect these gains and losses as a component of other income (expense), net, in the accompanying Consolidated Statements of Income.net.
The following table summarizes the estimated fair value of our investments in marketable debt securities accounted for as available-for-sale securities and classified by thestated contractual maturity date of the securitiesdates (in millions, unaudited)millions):
|
| | | |
| | As of
September 30, 2017 |
| Due in 1 year | $ | 22,234 |
|
| Due in 1 year through 5 years | 52,502 |
|
| Due in 5 years through 10 years | 2,172 |
|
| Due after 10 years | 12,063 |
|
| Total | $ | 88,971 |
|
Impairment Considerations for Marketable Investments | | | | | |
| As of
September 30, 2022 |
| Due in 1 year or less | $ | 7,998 | |
| Due in 1 year through 5 years | 58,061 | |
| Due in 5 years through 10 years | 11,848 | |
| Due after 10 years | 11,353 | |
| Total | $ | 89,260 | |
The following tables present fair values and gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2016 and September 30, 2017,recorded to accumulated other comprehensive income (AOCI), aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2016 |
| | Less than 12 Months | | 12 Months or Greater | | Total |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized
Loss |
| U.S. government notes | $ | 26,411 |
| | $ | (215 | ) | | $ | 0 |
| | $ | 0 |
| | $ | 26,411 |
| | $ | (215 | ) |
| U.S. government agencies | 1,014 |
| | (11 | ) | | 0 |
| | 0 |
| | 1,014 |
| | (11 | ) |
| Foreign government bonds | 956 |
| | (7 | ) | | 0 |
| | 0 |
| | 956 |
| | (7 | ) |
| Municipal securities | 3,461 |
| | (63 | ) | | 46 |
| | (2 | ) | | 3,507 |
| | (65 | ) |
| Corporate debt securities | 6,184 |
| | (111 | ) | | 166 |
| | (5 | ) | | 6,350 |
| | (116 | ) |
| Agency mortgage-backed securities | 10,184 |
| | (206 | ) | | 259 |
| | (10 | ) | | 10,443 |
| | (216 | ) |
| Asset-backed securities | 391 |
| | (1 | ) | | 0 |
| | 0 |
| | 391 |
| | (1 | ) |
| Total | $ | 48,601 |
| | $ | (614 | ) | | $ | 471 |
| | $ | (17 | ) | | $ | 49,072 |
| | $ | (631 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2017 |
| | Less than 12 Months | | 12 Months or Greater | | Total |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized
Loss |
| | (unaudited) |
| U.S. government notes | $ | 26,626 |
| | $ | (115 | ) | | $ | 5,409 |
| | $ | (48 | ) | | $ | 32,035 |
| | $ | (163 | ) |
| U.S. government agencies | 2,751 |
| | (9 | ) | | 0 |
| | 0 |
| | 2,751 |
| | (9 | ) |
| Foreign government bonds | 1,362 |
| | (13 | ) | | 123 |
| | (2 | ) | | 1,485 |
| | (15 | ) |
| Municipal securities | 2,118 |
| | (6 | ) | | 432 |
| | (4 | ) | | 2,550 |
| | (10 | ) |
| Corporate debt securities | 11,153 |
| | (27 | ) | | 793 |
| | (8 | ) | | 11,946 |
| | (35 | ) |
| Agency mortgage-backed securities | 8,450 |
| | (62 | ) | | 728 |
| | (14 | ) | | 9,178 |
| | (76 | ) |
| Asset-backed securities | 2,572 |
| | (4 | ) | | 0 |
| | 0 |
| | 2,572 |
| | (4 | ) |
| Marketable equity securities | 38 |
| | (2 | ) | | 0 |
| | 0 |
| | 38 |
| | (2 | ) |
| Total | $ | 55,070 |
| | $ | (238 | ) | | $ | 7,485 |
| | $ | (76 | ) | | $ | 62,555 |
| | $ | (314 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
| | Less than 12 Months | | 12 Months or Greater | | Total |
| | Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss |
| Government bonds | $ | 32,843 | | | $ | (236) | | | $ | 71 | | | $ | (2) | | | $ | 32,914 | | | $ | (238) | |
| Corporate debt securities | 22,737 | | | (152) | | | 303 | | | (5) | | | 23,040 | | | (157) | |
| Mortgage-backed and asset-backed securities | 11,502 | | | (106) | | | 248 | | | (6) | | | 11,750 | | | (112) | |
| Total | $ | 67,082 | | | $ | (494) | | | $ | 622 | | | $ | (13) | | | $ | 67,704 | | | $ | (507) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2022 |
| | Less than 12 Months | | 12 Months or Greater | | Total |
| | Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss | | Fair Value | | Unrealized
Loss |
| Government bonds | $ | 31,685 | | | $ | (1,864) | | | $ | 8,064 | | | $ | (659) | | | $ | 39,749 | | | $ | (2,523) | |
| Corporate debt securities | 19,378 | | | (1,042) | | | 7,431 | | | (697) | | | 26,809 | | | (1,739) | |
| Mortgage-backed and asset-backed securities | 11,316 | | | (992) | | | 3,886 | | | (384) | | | 15,202 | | | (1,376) | |
| Total | $ | 62,379 | | | $ | (3,898) | | | $ | 19,381 | | | $ | (1,740) | | | $ | 81,760 | | | $ | (5,638) | |
During the three and nine months ended September 30, 2021 and 2022, we did not recognize significant credit losses, and the ending allowance balances for credit losses were immaterial as of December 31, 2021 and September 30, 2022. See Note 6 for further details on other income (expense), net.
Equity Investments
The following discusses our marketable equity securities, non-marketable equity securities, gains and losses on marketable and non-marketable equity securities, as well as our equity securities accounted for under the equity method.
Our marketable equity securities are publicly traded stocks or funds measured at fair value and classified within Level 1 and 2 in the fair value hierarchy because we use quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar instruments in active markets.
Our non-marketable equity securities are investments in privately held companies without readily determinable market values. The carrying value of our non-marketable equity securities is adjusted to fair value upon observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). Non-marketable equity securities that have been remeasured during the period based on observable transactions are classified within Level 2 or Level 3 in the fair value hierarchy because we estimate the value based on valuation methods which may include a combination of the observable transaction price at the transaction date and other unobservable inputs includingvolatility, rights, and obligations of the securities we hold. The fair value of non-marketable equity securities that have been remeasured due to impairment are classified within Level 3.
Gains and losses on marketable and non-marketable equity securities
Gains and losses (including impairments) reflected in other income (expense), net, for marketable and non-marketable equity securities are summarized below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
| Net gain (loss) on equity securities sold during the period | $ | (36) | | | $ | (73) | | | $ | 545 | | | $ | (355) | |
| Net unrealized gain (loss) on equity securities held as of the end of the period | 2,157 | | | (574) | | | 9,185 | | | (1,613) | |
| Total gain (loss) recognized in other income (expense), net | $ | 2,121 | | | $ | (647) | | | $ | 9,730 | | | $ | (1,968) | |
In the table above, net gain (loss) on equity securities sold during the period reflects the difference between the sale proceeds and the carrying value of the equity securities at the beginning of the period or the purchase date, if later.
Cumulative net gains (losses) on equity securities sold during the period, which is summarized in the following table (in millions), represents the total net gains (losses) recognized after the initial purchase date of the equity security. While these net gains (losses) may have been reflected in periods prior to the period of sale, we believe they are important supplemental information as they reflect the economic net gains (losses) on the securities sold during the period. Cumulative net gains (losses) are calculated as the difference between the sale price and the initial purchase price for the equity security sold during the period.
| | | | | | | | | | | | | | | | | | | | | | | |
| Equity Securities Sold |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| | 2021 | | 2022 | | 2021 | | 2022 |
| Total sale price | $ | 1,199 | | | $ | 296 | | | $ | 4,553 | | | $ | 1,631 | |
| Total initial cost | 188 | | | 310 | | | 955 | | | 738 | |
Cumulative net gain (loss)(1) | $ | 1,011 | | | $ | (14) | | | $ | 3,598 | | | $ | 893 | |
(1)Cumulative net gains for the nine months ended September 30, 2021 excludes cumulative losses of $684 million resulting from our equity derivatives, which hedged the changes in fair value of certain marketable equity securities sold. The associated derivative liabilities arising from these losses were settled against our holdings of the underlying equity securities.
Carrying value of marketable and non-marketable equity securities
The carrying value is measured as the total initial cost plus the cumulative net gain (loss). The carrying values for marketable and non-marketable equity securities are summarized below (in millions): | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| Marketable Securities | | Non-Marketable Securities | | Total |
| Total initial cost | $ | 4,211 | | | $ | 15,135 | | | $ | 19,346 | |
Cumulative net gain (loss)(1) | 3,587 | | | 12,436 | | | 16,023 | |
Carrying value(2) | $ | 7,798 | | | $ | 27,571 | | | $ | 35,369 | |
(1)Non-marketable equity securities cumulative net gain (loss) is comprised of $14.1 billion gains and $1.7 billion losses (including impairments).
(2)The long-term portion of marketable equity securities (subject to long-term lock-up restrictions) of $1.4 billion is included within other non-current assets.
| | | | | | | | | | | | | | | | | |
| As of September 30, 2022 |
| Marketable Securities | | Non-Marketable Securities | | Total |
| Total initial cost | $ | 5,752 | | | $ | 15,540 | | | $ | 21,292 | |
Cumulative net gain (loss)(1) | 104 | | | 13,104 | | | 13,208 | |
Carrying value(2) | $ | 5,856 | | | $ | 28,644 | | | $ | 34,500 | |
(1)Non-marketable equity securities cumulative net gain (loss) is comprised of $16.9 billion gains and $3.8 billion losses (including impairments).
(2)The long-term portion of marketable equity securities (subject to long-term lock-up restrictions) of $841 million is included within other non-current assets.
Marketable equity securities
The following table summarizes marketable equity securities measured at fair value by significant investment categories (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 | | As of September 30, 2022 |
| | Cash and Cash Equivalents | | Marketable
Securities | | Cash and Cash Equivalents | | Marketable
Securities |
| Level 1: | | | | | |
| Money market funds | $ | 7,499 | | | $ | 0 | | | $ | 8,318 | | | $ | 0 | |
Marketable equity securities(1)(2) | 0 | | | 7,447 | | | 0 | | | 5,509 | |
| 7,499 | | | 7,447 | | | 8,318 | | | 5,509 | |
| Level 2: | | | | | | | |
| Mutual funds | 0 | | | 351 | | | 0 | | | 347 | |
| Total | $ | 7,499 | | | $ | 7,798 | | | $ | 8,318 | | | $ | 5,856 | |
(1)The balance as of December 31, 2021 and September 30, 2022 includes investments that were reclassified from non-marketable equity securities following the commencement of public market trading of the issuers or acquisition by public entities (certain investments are subject to short-term lock-up restrictions).
(2)As of December 31, 2021 and September 30, 2022 the long-term portion of marketable equity securities (subject to long-term lock-up restrictions) of $1.4 billion and $841 million, respectively, is included within other non-current assets.
Non-marketable equity securities
The following is a summary of unrealized gains and losses (including impairments) recorded in other income (expense), net, which are included as adjustments to the carrying value of non-marketable equity securities held as of the end of the period (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
| Unrealized gains on non-marketable equity securities | $ | 1,260 | | | $ | 219 | | | $ | 6,245 | | | $ | 3,234 | |
| Unrealized losses on non-marketable equity securities (including impairments) | (37) | | | (707) | | | (98) | | | (2,353) | |
| Total unrealized gain (loss) recognized on non-marketable equity securities | $ | 1,223 | | | $ | (488) | | | $ | 6,147 | | | $ | 881 | |
During the three months ended September 30, 20162022, included in the $28.6 billion of non-marketable equity securities held as of the end of the period, $1.7 billion were measured at fair value resulting in a net unrealized loss of $488 million.
Equity securities accounted for under the Equity Method
As of December 31, 2021 and the three and nine months ended September 30, 2017, we did not recognize any other-than-temporary impairment losses. During2022, equity securities accounted for under the nine months ended September 30, 2016, we recognized $87 millionequity method had a carrying value of other-than-temporary impairmentapproximately $1.5 billion and $1.3 billion, respectively. Our share of gains and losses, related to our marketable equity securities. Those lossesincluding impairments, are included in gain (loss) on marketable securities, net, as a component of other income (expense), net, in the accompanying Consolidated Statements of Income. See Note 6 for further details on other income (expense), net.
Derivative Financial Instruments
We enter into derivative instruments to manage risks relating to our ongoing business operations. The primary risk managed with derivative instruments is foreign exchange risk. We use foreign currency contracts to reduce the risk that our cash flows, earnings, and investment in foreign subsidiaries will be adversely affected by foreign currency exchange rate fluctuations. We also enter into derivative instruments to partially offset our exposure to other risks and enhance investment returns.
We recognize derivative instruments as either assets or liabilities in the accompanying Consolidated Balance Sheets at fair value.value and classify the derivatives primarily within Level 2 in the fair value hierarchy. We present our collar contracts (an option strategy comprised of a combination of purchased and written options) at net fair values where both the purchased and written options are with the same counterparty. For other derivative contracts, we present at gross
fair values. We primarily record changes in the fair value (i.e., gains or losses) of the derivatives in the accompanying Consolidated Statements of Income as either other income (expense), net, or revenues, or in the accompanying Consolidated Balance Sheets in accumulated other comprehensive income (AOCI),AOCI, as discussed below.
We enter into foreign currency contracts with financial institutions to reduce the risk that our cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. We use certain interest rate derivative contracts to hedge interest rate exposures on our fixed income securities and debt issuances. Our program is not used for trading or speculative purposes.
We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. To further reduce credit risk,Further, we enter into collateral security arrangements under which the counterparty is requiredthat provide for collateral to provide collateralbe received or pledged when the net fair value of certain financial instruments fluctuates from contractually established thresholds. We can take possession of theCash collateral in the event of counterparty default. As of December 31, 2016 and September 30, 2017, we received cash collateral related to the derivative instruments under our collateral security arrangements of $362 millionare included in other current assets with a corresponding liability. Cash and $47 million, respectively.non-cash collateral pledged related to derivative instruments under our collateral security arrangements are included in other current assets.
Cash Flow Hedges
We usedesignate foreign currency forwardsforward and option contracts including collars (an option strategy comprised of a combination of purchased and written options), designated(including collars) as cash flow hedges to hedge certain forecastedforecasted revenue transactions denominated in currencies other than the U.S. dollar and at times we use interest rate swaps to effectively lock interest rates on anticipated debt issuances. These transactions are designated as cash flow hedges. The notional principal of these contracts was approximately $10.7 billion and $11.7 billion as of December 31, 2016 and September 30, 2017, respectively.dollar. These contracts have maturities of 24 months or less.less.
We reflect gain or loss on the effective portion of a cashCash flow hedge as a componentamounts included in the assessment of hedge effectiveness are deferred in AOCI and subsequently reclassify cumulative gains and lossesreclassified to revenues or interest expenserevenue when the hedged transactions are recorded.item is recognized in earnings. We exclude the change in forward points and time value from our assessment of hedge effectiveness. The initial value of the excluded component is amortized on a straight-line basis over the life of the hedging instrument and recognized in revenues. The difference between fair value changes of the excluded component and the amount amortized to revenues is recorded in AOCI. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI are immediately reclassified to other income (expense), net.For foreign currency collars, we include the change in time value in our assessment of hedge effectiveness.For forwards and all other option contracts, we exclude the changenet in the forward points and time value from our assessmentperiod of hedge effectiveness. We recognize changes of the excluded components in other income (expense), net.de-designation.
As of September 30, 2017,2022, the effective portion ofnet accumulated gain on our foreign currency cash flow hedges before tax effect was a net accumulated loss of $440 million, of$1.9 billion, which a net loss of $473 million is expected to be reclassified from AOCI into earnings within the next 12 months.
Fair Value Hedges
We usedesignate foreign currency forward contracts designated as fair value hedges to hedge foreign currency risks for our investments denominated in currencies other than the U.S. dollar. We exclude changesFair value hedge amounts included in forward points for the forward contracts from the assessment of hedge effectiveness. The notional principal of these contracts was $2.4 billion and $2.5 billion as of December 31, 2016 and September 30, 2017, respectively.
Gains and losses on these forward contractseffectiveness are recognized in other income (expense), net, along with the offsetting gains and losses of the related hedged items. We exclude changes in forward points from the assessment of hedge effectiveness and recognize changes in the excluded component in other income (expense), net.
Net Investment Hedges
We designate foreign currency forward contracts as net investment hedges to hedge the foreign currency risks related to our investment in foreign subsidiaries. Net investment hedge amounts included in the assessment of hedge effectiveness are recognized in AOCI along with the foreign currency translation adjustment. We exclude changes in forward points from the assessment of hedge effectiveness and recognize changes in the excluded component in other income (expense), net.
Other Derivatives
Other derivatives not designated as hedging instruments consist primarily of foreign currency forward contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the localfunctional currency of a subsidiary. We recognize gainsGains and losses on these contracts, as well as the related costs, are recognized in other income (expense), net, along with the foreign currency gains and losses on monetary assets and liabilities. The notional principal of
We also use derivatives not designated as hedging instruments to manage risks relating to interest rates, commodity prices, credit exposures and to enhance investment returns. Additionally, from time to time, we enter into derivatives to hedge the outstanding foreign exchange contracts was $7.9 billion and $17.2 billion as of December 31, 2016 and September 30, 2017, respectively.
The fair valuesmarket price risk on certain of our marketable equity securities. Gains (losses) arising from these derivatives are reflected within the "other" component of other income (expense), net and the offsetting recognized gains (losses) on the marketable equity securities are reflected within the gain (loss) on equity securities, net component of other income (expense), net. See Note 6 for further details on other income (expense), net.
The gross notional amounts of outstanding derivative instruments were as follows (in millions): | | | | | | | | | | | |
| As of December 31, 2021 | | As of September 30, 2022 |
| Derivatives Designated as Hedging Instruments: | | |
| Foreign exchange contracts | | | |
| Cash flow hedges | $ | 16,362 | | | $ | 17,513 | |
| Fair value hedges | $ | 2,556 | | | $ | 2,435 | |
| Net investment hedges | $ | 10,159 | | | $ | 8,993 | |
| Derivatives Not Designated as Hedging Instruments: | | |
| Foreign exchange contracts | $ | 41,031 | | | $ | 36,988 | |
| Other contracts | $ | 4,275 | | | $ | 6,728 | |
The fair values of outstanding derivative instruments were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, 2021 |
| Balance Sheet Location | | Fair Value of
Derivatives
Designated as
Hedging Instruments | | Fair Value of
Derivatives Not
Designated as
Hedging Instruments | | Total Fair Value |
| Derivative Assets: | | | | | | |
| Level 2: | | | | | | | |
| Foreign exchange contracts | Other current and non-current assets | | $ | 867 | | | $ | 42 | | | $ | 909 | |
| Other contracts | Other current and non-current assets | | 0 | | | 52 | | | 52 | |
| Total | | | $ | 867 | | | $ | 94 | | | $ | 961 | |
| Derivative Liabilities: | | | | | | |
| Level 2: | | | | | | | |
| Foreign exchange contracts | Accrued expenses and other liabilities, current and non-current | | $ | 8 | | | $ | 452 | | | $ | 460 | |
| Other contracts | Accrued expenses and other liabilities, current and non-current | | 0 | | | 121 | | | 121 | |
| Total | | | $ | 8 | | | $ | 573 | | | $ | 581 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of September 30, 2022 |
| Balance Sheet Location | | Fair Value of
Derivatives
Designated as
Hedging Instruments | | Fair Value of
Derivatives Not
Designated as
Hedging Instruments | | Total Fair Value |
| Derivative Assets: | | | | | | |
| Level 2: | | | | | | | |
| Foreign exchange contracts | Other current and non-current assets | | $ | 2,317 | | | $ | 226 | | | $ | 2,543 | |
| Other contracts | Other current and non-current assets | | 0 | | | 46 | | | 46 | |
| Total | | | $ | 2,317 | | | $ | 272 | | | $ | 2,589 | |
| Derivative Liabilities: | | | | | | |
| Level 2: | | | | | | | |
| Foreign exchange contracts | Accrued expenses and other liabilities, current and non-current | | $ | 13 | | | $ | 820 | | | $ | 833 | |
| Other contracts | Accrued expenses and other liabilities, current and non-current | | 0 | | | 45 | | | 45 | |
| Total | | | $ | 13 | | | $ | 865 | | | $ | 878 | |
|
| | | | | | | | | | | | | |
| | | | As of December 31, 2016 |
| Balance Sheet Location | | Fair Value of Derivatives Designated as Hedging Instruments | | Fair Value of Derivatives Not Designated as Hedging Instruments | | Total Fair Value |
| Derivative Assets: | | | | | | | |
| Level 2: | | | | | | | |
| Foreign exchange contracts | Other current and non-current assets | | $ | 539 |
| | $ | 57 |
| | $ | 596 |
|
| Total | | | $ | 539 |
| | $ | 57 |
| | $ | 596 |
|
| Derivative Liabilities: | | | | | | | |
| Level 2: | | | | | | | |
| Foreign exchange contracts | Accrued expenses and other liabilities, current and non-current | | $ | 4 |
| | $ | 9 |
| | $ | 13 |
|
| Total | | | $ | 4 |
| | $ | 9 |
| | $ | 13 |
|
|
| | | | | | | | | | | | | |
| | | | As of September 30, 2017 |
| Balance Sheet Location | | Fair Value of
Derivatives
Designated as
Hedging Instruments | | Fair Value of
Derivatives Not
Designated as
Hedging Instruments | | Total Fair
Value |
| | | | (unaudited) |
| Derivative Assets: | | | | | | | |
| Level 2: | | | | | | | |
| Foreign exchange contracts | Other current and non-current assets | | $ | 53 |
| | $ | 113 |
| | $ | 166 |
|
| Total | | | $ | 53 |
| | $ | 113 |
| | $ | 166 |
|
| Derivative Liabilities: | | | | | | | |
| Level 2: | | | | | | | |
| Foreign exchange contracts | Accrued expenses and other liabilities, current and non-current | | $ | 459 |
| | $ | 123 |
| | $ | 582 |
|
| Total | | | $ | 459 |
| | $ | 123 |
| | $ | 582 |
|
The effect of derivative instrumentsgains (losses) on derivatives in cash flow hedging and net investment hedging relationships on income andrecognized in other comprehensive income (OCI) isare summarized below (in millions, unaudited)millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect |
| Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
| Derivatives in Cash Flow Hedging Relationship: | | | | | | | |
| Foreign exchange contracts | | | | | | | |
| Amount included in the assessment of effectiveness | $ | 336 | | | $ | 1,486 | | | $ | 438 | | | $ | 2,752 | |
| Amount excluded from the assessment of effectiveness | 18 | | | (77) | | | 63 | | | (131) | |
| | | | | | | |
| Derivatives in Net Investment Hedging Relationship: | | | | | | | |
| Foreign exchange contracts | | | | | | | |
| Amount included in the assessment of effectiveness | 212 | | | 760 | | | 411 | | | 1,418 | |
| Total | $ | 566 | | | $ | 2,169 | | | $ | 912 | | | $ | 4,039 | |
|
| | | | | | | | | | | | | | | |
| | Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect (Effective Portion) |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| Derivatives in Cash Flow Hedging Relationship | 2016 | | 2017 | | 2016 | | 2017 |
| Foreign exchange contracts | $ | 52 |
| | $ | (324 | ) | | $ | 240 |
| | $ | (1,011 | ) |
|
| | | | | | | | | | | | | | | | | |
| | Gains (Losses) Reclassified from AOCI into Income (Effective Portion) |
| | | | Three Months Ended | | Nine Months Ended |
| | | | September 30, | | September 30, |
| Derivatives in Cash Flow Hedging Relationship | Location | | 2016 | | 2017 | | 2016 | | 2017 |
| Foreign exchange contracts | Revenues | | $ | 105 |
| | $ | (191 | ) | | $ | 352 |
| | $ | 29 |
|
| Interest rate contracts | Other income (expense), net | | 1 |
| | 1 |
| | 4 |
| | 4 |
|
| Total | | | $ | 106 |
| | $ | (190 | ) | | $ | 356 |
| | $ | 33 |
|
|
| | | | | | | | | | | | | | | | | |
| | Gains (Losses) Recognized in Income on Derivatives
(Amount Excluded from Effectiveness Testing and Ineffective Portion) (1) |
| | | | Three Months Ended | | Nine Months Ended |
| | | | September 30, | | September 30, |
| Derivatives in Cash Flow Hedging Relationship | Location | | 2016 | | 2017 | | 2016 | | 2017 |
| Foreign exchange contracts | Other income (expense), net | | $ | (102 | ) | | $ | 26 |
| | $ | (361 | ) | | $ | 72 |
|
| |
(1)
| Gains (losses) related to the ineffective portion of the hedges were not material in all periods presented. |
The effect of derivative instruments in fair value hedging relationships on income is summarized below (in millions, unaudited):
|
| | | | | | | | | | | | | | | | | |
| | Gains (Losses) Recognized in Income on Derivatives(2) |
| | | | Three Months Ended | | Nine Months Ended |
| | | | September 30, | | September 30, |
| Derivatives in Fair Value Hedging Relationship | Location | | 2016 | | 2017 | | 2016 | | 2017 |
| Foreign Exchange Hedges: | | | | | | | | | |
| Foreign exchange contracts | Other income (expense), net | | $ | 1 |
| | $ | (89 | ) | | $ | 26 |
| | $ | (216 | ) |
| Hedged item | Other income (expense), net | | 1 |
| | 94 |
| | (24 | ) | | 230 |
|
| Total | | | $ | 2 |
| | $ | 5 |
| | $ | 2 |
| | $ | 14 |
|
| |
(2)
| Amounts excluded from effectiveness testing and the ineffective portion of the fair value hedging relationships were not material in all periods presented. |
The effect of derivative instruments not designated as hedging instruments on income is summarized below (in
millions, unaudited)millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Gains (Losses) Recognized in Income |
| Three Months Ended |
| | September 30, |
| 2021 | | 2022 |
| Revenues | | Other income (expense), net | | Revenues | | Other income (expense), net |
| Total amounts presented in the Consolidated Statements of Income in which the effects of cash flow and fair value hedges are recorded | $ | 65,118 | | | $ | 2,033 | | | $ | 69,092 | | | $ | (902) | |
| | | | | | | |
| Gains (Losses) on Derivatives in Cash Flow Hedging Relationship: | | | | | | | |
| Foreign exchange contracts | | | | | | | |
| Amount of gains (losses) reclassified from AOCI to income | $ | 65 | | | $ | 0 | | | $ | 658 | | | $ | 0 | |
| Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach | (3) | | | 0 | | | (20) | | | 0 | |
| Gains (Losses) on Derivatives in Fair Value Hedging Relationship: | | | | | | | |
| Foreign exchange contracts | | | | | | | |
| Hedged items | 0 | | | (69) | | | 0 | | | (226) | |
| Derivatives designated as hedging instruments | 0 | | | 69 | | | 0 | | | 226 | |
| Amount excluded from the assessment of effectiveness | 0 | | | 2 | | | 0 | | | 6 | |
| Gains (Losses) on Derivatives in Net Investment Hedging Relationship: | | | | | | | |
| Foreign exchange contracts | | | | | | | |
| Amount excluded from the assessment of effectiveness | 0 | | | 19 | | | 0 | | | 59 | |
| Gains (Losses) on Derivatives Not Designated as Hedging Instruments: | | | | | | | |
| Foreign exchange contracts | 0 | | | (148) | | | 0 | | | (495) | |
| Other Contracts | 0 | | | (88) | | | 0 | | | 34 | |
| Total gains (losses) | $ | 62 | | | $ | (215) | | | $ | 638 | | | $ | (396) | |
|
| | | | | | | | | | | | | | | | | |
| | Gains (Losses) Recognized in Income on Derivatives |
| | | | Three Months Ended | | Nine Months Ended |
| | | | September 30, | | September 30, |
| Derivatives Not Designated As Hedging Instruments | Location | | 2016 | | 2017 | | 2016 | | 2017 |
| Foreign exchange contracts | Other income (expense), net | | $ | (67 | ) | | $ | (39 | ) | | $ | (147 | ) | | $ | (263 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Gains (Losses) Recognized in Income |
| Nine Months Ended |
| | September 30, |
| 2021 | | 2022 |
| Revenues | | Other income (expense), net | | Revenues | | Other income (expense), net |
| Total amounts presented in the Consolidated Statements of Income in which the effects of cash flow and fair value hedges are recorded | $ | 182,312 | | | $ | 9,503 | | | $ | 206,788 | | | $ | (2,501) | |
| | | | | | | |
| Gains (Losses) on Derivatives in Cash Flow Hedging Relationship: | | | | | | | |
| Foreign exchange contracts | | | | | | | |
| Amount of gains (losses) reclassified from AOCI to income | $ | (43) | | | $ | 0 | | | $ | 1,355 | | | $ | 0 | |
| Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach | (11) | | | 0 | | | (63) | | | 0 | |
| Gains (Losses) on Derivatives in Fair Value Hedging Relationship: | | | | | | | |
| Foreign exchange contracts | | | | | | | |
| Hedged items | 0 | | | (41) | | | 0 | | | (349) | |
| Derivatives designated as hedging instruments | 0 | | | 41 | | | 0 | | | 350 | |
| Amount excluded from the assessment of effectiveness | 0 | | | 6 | | | 0 | | | 9 | |
| Gains (Losses) on Derivatives in Net Investment Hedging Relationship: | | | | | | | |
| Foreign exchange contracts | | | | | | | |
| Amount excluded from the assessment of effectiveness | 0 | | | 60 | | | 0 | | | 99 | |
| Gains (Losses) on Derivatives Not Designated as Hedging Instruments: | | | | | | | |
| Foreign exchange contracts | 0 | | | (552) | | | 0 | | | (891) | |
| Other Contracts | 0 | | | 93 | | | 0 | | | 158 | |
| Total gains (losses) | $ | (54) | | | $ | (393) | | | $ | 1,292 | | | $ | (624) | |
Offsetting of Derivatives
We present our forwards and purchased options atThe gross fair values in the Consolidated Balance Sheets. For foreign currency collars, we present at net fair values where both purchased and written options are with the same counterparty. Ouramounts of derivative instruments subject to master netting arrangements with various counterparties, and other similar arrangements allow net settlementscash and non-cash collateral received and pledged under certain conditions. As of December 31, 2016 and September 30, 2017, information related to these offsetting arrangementssuch agreements were as follows (in millions):
Offsetting of Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | | |
| Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received | | Non-Cash Collateral Received | | Net Assets Exposed |
| Derivatives | $ | 999 | | | $ | (38) | | | $ | 961 | | | $ | (434) | | (1) | $ | (394) | | | $ | (12) | | | $ | 121 | |
| | | | | | | | | | | | | |
| As of September 30, 2022 |
| | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | | |
| Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received | | Non-Cash Collateral Received | | Net Assets Exposed |
| Derivatives | $ | 2,639 | | | $ | (50) | | | $ | 2,589 | | | $ | (755) | | (1) | $ | (1,609) | | | $ | (32) | | | $ | 193 | |
(1)The balances as of December 31, 2021 and September 30, 2022 were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with our master netting agreements.
Offsetting of Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | | |
| Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Pledged | | Non-Cash Collateral Pledged | | Net Liabilities |
| Derivatives | $ | 619 | | | $ | (38) | | | $ | 581 | | | $ | (434) | | (2) | $ | (4) | | | $ | (110) | | | $ | 33 | |
| | | | | | | | | | | | | |
| As of September 30, 2022 |
| | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | |
| Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Pledged | | Non-Cash Collateral Pledged | | Net Liabilities |
| Derivatives | $ | 928 | | | $ | (50) | | | $ | 878 | | | $ | (755) | | (2) | $ | (15) | | | $ | (2) | | | $ | 106 | |
(2) The balances as of December 31, 2021 and September 30, 2022 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2016 |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | | |
| Description | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received | | Non-Cash Collateral Received | | Net Assets Exposed |
| Derivatives | $ | 596 |
| | $ | 0 |
| | $ | 596 |
| | $ | (11 | ) | (1) | $ | (337 | ) | | $ | (73 | ) | | $ | 175 |
|
| | | | | | | | | | | | | | |
| | As of September 30, 2017 |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | | |
| Description | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received | | Non-Cash Collateral Received | | Net Assets Exposed |
| | (unaudited) |
| Derivatives | $ | 183 |
| | $ | (17 | ) | | $ | 166 |
| | $ | (122 | ) | (1) | $ | (37 | ) | | $ | 0 |
| | $ | 7 |
|
| | | | | |
| The balances as of December 31, 2016 and September 30, 2017 were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with our master netting agreements.Alphabet Inc. |
Offsetting of Liabilities
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2016 |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | | |
| Description | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Pledged | | Non-Cash Collateral Pledged | | Net Liabilities |
| Derivatives | $ | 13 |
| | $ | 0 |
| | $ | 13 |
| | $ | (11 | ) | (2) | $ | 0 |
| | $ | 0 |
| | $ | 2 |
|
| | | | | | | | | | | | | | |
| | As of September 30, 2017 |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | |
| Description | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Pledged | | Non-Cash Collateral Pledged | | Net Liabilities |
| | (unaudited) |
| Derivatives | $ | 599 |
| | $ | (17 | ) | | $ | 582 |
| | $ | (122 | ) | (2) | $ | 0 |
| | $ | 0 |
| | $ | 460 |
|
| |
(2)
| The balances as of December 31, 2016 and September 30, 2017 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements. |
Note 4. Non-Marketable InvestmentsVariable Interest Entities (VIE)
Our non-marketable investments include non-marketable equity investments and non-marketable debt securities.Consolidated VIEs
Non-Marketable Equity Investments
Our non-marketable equity investments are investmentsWe consolidate VIEs in which we have made in privately-held companies accounted for under the equity or cost methodhold a variable interest and are the primary beneficiary. The results of operations and financial position of these VIEs are included in our consolidated financial statements.
For certain consolidated VIEs, their assets are not requiredavailable to be consolidated under the variable interest or voting models.
us and their creditors do not have recourse to us. As of December 31, 20162021 and September 30, 2017, investments accounted for under the equity method had a carrying value2022, assets that can only be used to settle obligations of approximately $1.7 billion. Our share of gainsthese VIEs were $6.0 billion and losses in equity method investments including impairment was a net loss of approximately $61 million and $31 million for the three months ended September 30, 2016 and 2017,$4.8 billion, respectively, and a net loss of $209 millionthe liabilities for which creditors only have recourse to the VIEs were $2.5 billion and $93 million for the nine months ended September 30, 2016 and 2017,$2.7 billion, respectively.
As of December 31, 20162021 and September 30, 2017, investments accounted for under the cost method had a carrying value of $3.02022, total noncontrolling interests (NCI), including redeemable noncontrolling interests (RNCI), in our consolidated subsidiaries were $4.3 billion and $3.6 billion, respectively, and a fair value of approximately $8.1 billion and $8.9$3.9 billion, respectively. The fair value ofNCI and RNCI are included within additional paid-in capital. Net loss attributable to noncontrolling interests was not material for any period presented and is included within the cost method investments are primarily determined from data leveraging private-market transactions and are classified within Level 3 in the fair value hierarchy. We reflect our share of equity method investee earnings and losses and impairments of non-marketable equity investments as a"other" component of other income (expense), net,net. See Note 6 for further details on other income (expense), net.
Unconsolidated VIEs
We have investments in VIEs in which we are not the accompanying Consolidated Statements of Income.
Certainprimary beneficiary. These VIEs include private companies that are primarily early stage companies and certain renewable energy investments includedentities in our non-marketable equity investments accounted for under the equity method are variable interest entities (VIE). These entities'which activities involve power generation using renewable sources.
We have determined that the governance structures of these entities do not allow us to direct the activities that would significantly impact the VIE'saffect their economic performance such as setting operating budgets.performance. Therefore, we doare not consolidatethe primary beneficiary, and the results of operations and financial position of these VIEs are not included in our consolidated financial statements. We account for these investments as non-marketable equity securities or equity method investments.
The carrying value and maximum exposure of these unconsolidated VIEs were $1.2 billion as of December 31, 2016 and $1.1 billion as of September 30, 2017. The maximum exposure is generally based on the current carrying value of the investments to date.and any future funding commitments. We have determined that the single source of our exposure to these VIEs is our capital investmentinvestments in these entities. We periodically reassess whether we are the primary beneficiary of a VIE.them. The reassessment process considers whether we have acquired the power to direct the most significant activities of the VIE through changes in governing documents or other circumstances. We also reconsider whether entities previously determined not to be VIEs have become VIEs,carrying value and vice versa, based on changes in facts and circumstances including changes in contractual arrangements and capital structure.
Non-Marketable Debt Securities
Our non-marketable debt securities are primarily preferred stock that are redeemable at our option and convertible notes issued by private companies. The costmaximum exposure of these securitiesunconsolidated VIEs were $1.1$2.7 billion and $2.9 billion, respectively, as of December 31, 20162021 and$2.6 billion and $2.6 billion, respectively, as of September 30, 2017. These debt securities do not have readily determinable market values and are categorized accordingly as Level 3 in the fair value hierarchy. To estimate the fair value of these securities, we use a combination of valuation methodologies, including market and income approaches based on prior transaction prices; estimated timing, probability, and amount of cash flows; and illiquidity considerations. Financial information of private companies may not be available and consequently we estimate the value based on the best available information at the measurement date. No significant impairments were recognized for the three and nine months ended September 30, 2016 and 2017.2022.
The following table presents a reconciliation for our non-marketable debt securities measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3) (in millions, unaudited):
|
| | | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2016 | | 2017 |
| Beginning balance | $ | 1,024 |
| | $ | 1,165 |
|
| Total net gains (losses) | | | |
| Included in earnings | 0 |
| | (5 | ) |
| Included in other comprehensive income | 100 |
| | 699 |
|
| Purchases | 78 |
| | 85 |
|
| Sales | (7 | ) | | (1 | ) |
| Settlements | (16 | ) | | (54 | ) |
| Ending balance | $ | 1,179 |
| | $ | 1,889 |
|
Note 5. Debt
Short-Term Debt
We have a debt financing program of up to $5.0 $10.0 billion through the issuance of commercial paper. Net proceeds from this program are used for general corporate purposes. We had no commercialcommercial paper outstanding as of December 31, 20162021 and September 30, 2017.2022.
Our short-term debt balance also includes the current portion of certain long-term debt.
Long-Term Debt
Google issued $3.0 billion of senior unsecured notes in three tranches (collectively, 2011 Notes) in May 2011, due in 2014, 2016, and 2021, as well as $1.0 billion of senior unsecured notes (2014 Notes) in February 2014 due in 2024.
In April 2016, we completed an exchange offer with eligible holders of Google’s 2011 Notes due 2021 and 2014 Notes due 2024 (collectively, the Google Notes). An aggregate principal amount of approximately $1.7 billion of the Google Notes was exchanged for approximately $1.7 billion of Alphabet notes with identical interest rate and maturity. Because the exchange was between a parent and the subsidiary company and for substantially identical notes, the change was treated as a debt modification for accounting purposes with no gain or loss recognized.
In August 2016, Alphabet issued $2.0 billion of senior unsecured notes (2016 Notes) due 2026. The net proceeds from the issuance of the 2016 Notes were used for general corporate purposes, including the repayment ofTotal outstanding commercial paper. The Alphabet notes due in 2021, 2024, and 2026 rank equally with each other and are structurally subordinate to the outstanding Google Notes.
The total outstanding long-term debt is summarized below (in
millions)millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturity | | Coupon Rate | | Effective Interest Rate | | As of December 31, 2021 | | As of
September 30, 2022 |
| Debt | | | | | | | | | | |
| 2014-2020 Notes Issuances | | 2024 - 2060 | | 0.45% - 3.38% | | 0.57% - 3.38% | | $ | 13,000 | | | $ | 13,000 | |
Future finance lease payments, net and other (1) | | | | | | | | 2,086 | | | 2,213 | |
| Total debt | | | | | | | | 15,086 | | | 15,213 | |
| Unamortized discount and debt issuance costs | | | | | | | | (156) | | | (146) | |
Less: Current portion future finance lease payments, net and other current debt(1)(2) | | | | | | | | (113) | | | (414) | |
| Total long-term debt | | | | | | | | $ | 14,817 | | | $ | 14,653 | |
(1)Future finance lease payments are net of imputed interest.
(2)Total current portion of long-term debt is included within other accrued expenses and current liabilities. See Note 6 for further details.
|
| | | | | | | |
| | As of
December 31, 2016 | | As of
September 30, 2017 |
| | | | (unaudited) |
| Long-term debt | | | |
| 3.625% Notes due on May 19, 2021 | $ | 1,000 |
| | $ | 1,000 |
|
| 3.375% Notes due on February 25, 2024 | 1,000 |
| | 1,000 |
|
| 1.998% Notes due on August 15, 2026 | 2,000 |
| | 2,000 |
|
| Unamortized discount for the Notes above | (65 | ) | | (59 | ) |
Subtotal(1) | $ | 3,935 |
| | $ | 3,941 |
|
| Capital lease obligation | 0 |
| | 23 |
|
| Total long-term debt | $ | 3,935 |
| | $ | 3,964 |
|
| | | | | |
| Includes the outstanding (and unexchanged) Google Notes issued in 2011 and 2014 and the Alphabet notes exchanged in 2016.Inc. |
The effective interest yields based on proceeds received fromnotes in the outstanding notes due in 2021, 2024,table above are fixed-rate senior unsecured obligations and 2026 were 3.734%, 3.377%, and 2.231%, respectively,generally rank equally with interest payable semi-annually.each other. We may redeem thesethe notes at any time in whole or in part at specified redemption prices. The effective interest rates are based on proceeds received with interest payable semi-annually.
The total estimated fair value of allthe outstanding notes was approximately $3.9$12.4 billion and $9.7 billion as of December 31, 20162021 and $4.0 billion as of September 30, 2017.2022, respectively. The fair value was determined based on observable market prices of identical instruments in less active markets and is categorized accordingly as Level 2 in the fair value hierarchy.
The effective rate of the capital lease obligation approximates the market rate. The estimated fair value of the capital lease obligation approximated its carrying value asCredit Facility
As of September 30, 2017.
Credit Facility
We have a2022, we had $10.0 billion of revolving credit facilities, $4.0 billion revolving credit facility which expiresexpiring in February 2021.April 2023 and $6.0 billion expiring in April 2026. The interest raterates for theall credit facility isfacilities are determined based on a formula using certain market rates.rates, as well as our progress toward the achievement of certain sustainability goals. No amounts amounts were outstanding under the credit facilityfacilities as of December 31, 20162021 and September 30, 2017.2022.
Note 6. Supplemental Financial Statement Information
Accounts Receivable
The allowance for credit losses on accounts receivable was $550 million and $731 million as of December 31, 2021 and September 30, 2022, respectively.
Property and Equipment, Net
Property and equipment, net, consisted of the following (in millions):
|
| | | | | | | |
| | As of
December 31, 2016 | | As of
September 30, 2017 |
| | | | (unaudited) |
| Land and buildings | $ | 19,804 |
| | $ | 22,367 |
|
| Information technology assets | 16,084 |
| | 19,454 |
|
| Construction in progress | 8,166 |
| | 10,280 |
|
| Leasehold improvements | 3,415 |
| | 4,208 |
|
| Furniture and fixtures | 58 |
| | 49 |
|
| Property and equipment, gross | 47,527 |
| | 56,358 |
|
| Less: accumulated depreciation and amortization | (13,293 | ) | | (16,238 | ) |
| Property and equipment, net | $ | 34,234 |
| | $ | 40,120 |
|
As of September 30, 2017, assets under capital lease with a cost basis of $364 million were included in property and equipment.
Note Receivable
In connection with the sale of our Motorola Mobile business to Lenovo Group Limited (Lenovo) on October 29, 2014, we received an interest-free, three-year prepayable promissory note (Note Receivable) due October 2017. The Note Receivable was included on our Consolidated Balance Sheets in other current assets. Based on the general market conditions and the credit quality of Lenovo at the time of the sale, we discounted the Note Receivable at an effective interest rate of 4.5%. The Note Receivable was fully repaid in May 2017. The outstanding balances are shown in the table below (in millions):
|
| | | | | | | |
| | As of
December 31, 2016 | | As of
September 30, 2017 |
| | | | (unaudited) |
| Principal of the Note Receivable | $ | 1,448 |
| | $ | 0 |
|
| Less: unamortized discount for the Note Receivable | (51 | ) | | 0 |
|
| Total | $ | 1,397 |
| | $ | 0 |
|
As of December 31, 2016, we did not recognize a valuation allowance on the Note Receivable. | | | | | | | | | | | |
| As of
December 31, 2021 | | As of
September 30, 2022 |
| Land and buildings | $ | 58,881 | | | $ | 64,679 | |
| Information technology assets | 55,606 | | | 61,938 | |
| Construction in progress | 23,172 | | | 26,899 | |
| Leasehold improvements | 9,146 | | | 10,062 | |
| Furniture and fixtures | 208 | | | 297 | |
| Property and equipment, gross | 147,013 | | | 163,875 | |
| Less: accumulated depreciation | (49,414) | | | (55,512) | |
| Property and equipment, net | $ | 97,599 | | | $ | 108,363 | |
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following (in millions): | | | | | | | | | | | |
| As of
December 31, 2021 | | As of
September 30, 2022 |
European Commission fines(1) | $ | 9,799 | | | $ | 8,264 | |
| Accrued customer liabilities | 3,505 | | | 2,943 | |
| Accrued purchases of property and equipment | 2,415 | | | 3,255 | |
| Current operating lease liabilities | 2,189 | | | 2,285 | |
| Other accrued expenses and current liabilities | 13,328 | | | 18,291 | |
| Accrued expenses and other current liabilities | $ | 31,236 | | | $ | 35,038 | |
(1) Includes the effects of foreign exchange and interest. See Note 9 for further details.
|
| | | | | | | |
| | As of
December 31, 2016 | | As of
September 30, 2017 |
| | | | (unaudited) |
European Commission fine(1) | $ | 0 |
| | $ | 2,844 |
|
| Accrued customer liabilities | 1,256 |
| | 1,262 |
|
| Other accrued expenses and current liabilities | 4,888 |
| | 5,201 |
|
| Accrued expenses and other current liabilities | $ | 6,144 |
| | $ | 9,307 |
|
| | | | | |
| Includes the effects of foreign exchange.Alphabet Inc. |
Accumulated Other Comprehensive Income (Loss)
The componentsComponents of AOCI, net of income tax, were as follows (in millions, unaudited)millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Unrealized Gains (Losses) on Available-for-Sale Investments | | Unrealized Gains (Losses) on Cash Flow Hedges | | Total |
| Balance as of December 31, 2020 | $ | (864) | | | $ | 1,612 | | | $ | (115) | | | $ | 633 | |
| Other comprehensive income (loss) before reclassifications | (671) | | | (699) | | | 366 | | | (1,004) | |
| Amounts excluded from the assessment of hedge effectiveness recorded in AOCI | 0 | | | 0 | | | 63 | | | 63 | |
| Amounts reclassified from AOCI | 0 | | | (121) | | | 21 | | | (100) | |
| Other comprehensive income (loss) | (671) | | | (820) | | | 450 | | | (1,041) | |
| Balance as of September 30, 2021 | $ | (1,535) | | | $ | 792 | | | $ | 335 | | | $ | (408) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Unrealized Gains (Losses) on Available-for-Sale Investments | | Unrealized Gains (Losses) on Cash Flow Hedges | | Total |
| Balance as of December 31, 2021 | $ | (2,306) | | | $ | 236 | | | $ | 447 | | | $ | (1,623) | |
| Other comprehensive income (loss) before reclassifications | (3,801) | | | (5,204) | | | 2,296 | | | (6,709) | |
| Amounts excluded from the assessment of hedge effectiveness recorded in AOCI | 0 | | | 0 | | | (131) | | | (131) | |
| Amounts reclassified from AOCI | 0 | | | 743 | | | (1,132) | | | (389) | |
| Other comprehensive income (loss) | (3,801) | | | (4,461) | | | 1,033 | | | (7,229) | |
| Balance as of September 30, 2022 | $ | (6,107) | | | $ | (4,225) | | | $ | 1,480 | | | $ | (8,852) | |
|
| | | | | | | | | | | | | | | |
| | Foreign Currency Translation Adjustments | | Unrealized Gains (Losses) on Available-for-Sale Investments | | Unrealized Gains (Losses) on Cash Flow Hedges | | Total |
| Balance as of December 31, 2015 | $ | (2,047 | ) | | $ | (86 | ) | | $ | 259 |
| | $ | (1,874 | ) |
| Other comprehensive income (loss) before reclassifications | 166 |
| | 627 |
| | 148 |
| | 941 |
|
| Amounts reclassified from AOCI | 0 |
| | 137 |
| | (236 | ) | | (99 | ) |
| Other comprehensive income (loss) | 166 |
| | 764 |
| | (88 | ) | | 842 |
|
| Balance as of September 30, 2016 | $ | (1,881 | ) | | $ | 678 |
| | $ | 171 |
| | $ | (1,032 | ) |
|
| | | | | | | | | | | | | | | |
| | Foreign Currency Translation Adjustments | | Unrealized Gains (Losses) on Available-for-Sale Investments | | Unrealized Gains (Losses) on Cash Flow Hedges | | Total |
| Balance as of December 31, 2016 | $ | (2,646 | ) | | $ | (179 | ) | | $ | 423 |
| | $ | (2,402 | ) |
| Other comprehensive income (loss) before reclassifications | 1,457 |
| | 803 |
| | (668 | ) | | 1,592 |
|
| Amounts reclassified from AOCI | 0 |
| | 98 |
| | (34 | ) | | 64 |
|
| Other comprehensive income (loss) | 1,457 |
| | 901 |
| | (702 | ) | | 1,656 |
|
| Balance as of September 30, 2017 | $ | (1,189 | ) | | $ | 722 |
| | $ | (279 | ) | | $ | (746 | ) |
The effects on net income of amounts reclassified from AOCI were as follows (in millions, unaudited)millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Gains (Losses) Reclassified from AOCI to the Consolidated Statements of Income |
| | | | Three Months Ended | | Nine Months Ended |
| | | | | September 30, | | September 30, |
| AOCI Components | | Location | | 2021 | | 2022 | | 2021 | | 2022 |
| Unrealized gains (losses) on available-for-sale investments | | | | | | | | |
| | Other income (expense), net | | $ | 73 | | | $ | (464) | | | $ | 155 | | | $ | (953) | |
| | Benefit (provision) for income taxes | | (16) | | | 102 | | | (34) | | | 210 | |
| | Net of income tax | | 57 | | | (362) | | | 121 | | | (743) | |
| Unrealized gains (losses) on cash flow hedges | | | | | | | | |
| Foreign exchange contracts | | Revenue | | 65 | | | 658 | | | (43) | | | 1,355 | |
| Interest rate contracts | | Other income (expense), net | | 1 | | | 2 | | | 4 | | | 5 | |
| | Benefit (provision) for income taxes | | (6) | | | (113) | | | 18 | | | (228) | |
| | Net of income tax | | 60 | | | 547 | | | (21) | | | 1,132 | |
| Total amount reclassified, net of income tax | | $ | 117 | | | $ | 185 | | | $ | 100 | | | $ | 389 | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | Gains (Losses) Reclassified from AOCI to the Consolidated Statement of Income |
| | | | | Three Months Ended | | Nine Months Ended |
| | | | | September 30, | | September 30, |
| AOCI Components | | Location | | 2016 | | 2017 | | 2016 | | 2017 |
| Unrealized gains (losses) on available-for-sale investments | | | | | | | | |
| | | Other income (expense), net | | $ | 46 |
| | $ | (47 | ) | | $ | (137 | ) | | $ | (98 | ) |
| | | Provision for income taxes | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| | | Net of tax | | $ | 46 |
| | $ | (47 | ) | | $ | (137 | ) | | $ | (98 | ) |
| Unrealized gains (losses) on cash flow hedges | | | | | | | | |
| Foreign exchange contracts | | Revenue | | $ | 105 |
| | $ | (191 | ) | | $ | 352 |
| | $ | 29 |
|
| Interest rate contracts | | Other income (expense), net | | 1 |
| | 1 |
| | 4 |
| | 4 |
|
| | | Benefit (provision) for income taxes | | (39 | ) | | 65 |
| | (120 | ) | | 1 |
|
| | | Net of tax | | $ | 67 |
| | $ | (125 | ) | | $ | 236 |
| | $ | 34 |
|
| Total amount reclassified, net of tax | | $ | 113 |
| | $ | (172 | ) | | $ | 99 |
| | $ | (64 | ) |
Other Income (Expense), Net
The componentsComponents of other income (expense), net, were as follows (in millions, unaudited)millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| | 2021 | | 2022 | | 2021 | | 2022 |
| Interest income | $ | 387 | | | $ | 615 | | | $ | 1,121 | | | $ | 1,515 | |
Interest expense(1) | (77) | | | (101) | | | (229) | | | (267) | |
| Foreign currency exchange gain (loss), net | (139) | | | (136) | | | (77) | | | (469) | |
| Gain (loss) on debt securities, net | 37 | | | (731) | | | 62 | | | (1,888) | |
| Gain (loss) on equity securities, net | 2,121 | | | (647) | | | 9,730 | | | (1,968) | |
| Performance fees | (492) | | | 54 | | | (1,680) | | | 605 | |
| Income (loss) and impairment from equity method investments, net | 188 | | | (99) | | | 285 | | | (306) | |
| Other | 8 | | | 143 | | | 291 | | | 277 | |
| Other income (expense), net | $ | 2,033 | | | $ | (902) | | | $ | 9,503 | | | $ | (2,501) | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Interest income | $ | 318 |
| | $ | 306 |
| | $ | 895 |
| | $ | 912 |
|
| Interest expense | (29 | ) | | (27 | ) | | (91 | ) | | (73 | ) |
| Foreign currency exchange losses, net | (123 | ) | | (53 | ) | | (437 | ) | | (101 | ) |
| Gain (loss) on marketable securities, net | 50 |
| | (44 | ) | | (126 | ) | | (81 | ) |
| Gain (loss) on non-marketable investments, net | 40 |
| | (32 | ) | | (78 | ) | | (79 | ) |
| Other | 22 |
| | 47 |
| | 53 |
| | 115 |
|
| Other income (expense), net | $ | 278 |
| | $ | 197 |
| | $ | 216 |
| | $ | 693 |
|
(1)Interest expense in the preceding table is net of interest capitalized of $0$40 million and $13$28 million for the three months ended September 30, 20162021 and 2017,2022, respectively, and $0$132 million and $32$99 million for the nine months ended September 30, 20162021 and 2017,2022, respectively.
Note 7. Acquisitions
DuringMandiant Acquisition
On September 12, 2022 we closed the nine months ended September 30, 2017, we completed various acquisitionsacquisition of Mandiant for a total purchase price of $6.1 billion, including cash and purchases of intangible assets for total consideration of approximately $312 million. In aggregate, $12 million was cash acquired, $111 million was attributed to intangible assets, $205 million was attributed to goodwill,debt. The purchase price excludes post acquisition compensation arrangements. Mandiant's dynamic cyber defense, threat intelligence and $16 million was attributed to net liabilities assumed. These acquisitions generally enhance the breadth and depth of our offerings and expand our expertise in engineering and other functional areas. The amount of goodwillincident response services are expected to beenhance Google Cloud's security offerings. The financial results of Mandiant have been included within the Google Cloud segment as of the close of the acquisition.
The purchase price was allocated as follows (in millions):
| | | | | |
| Intangible assets | $ | 840 | |
Goodwill(1) | 4,772 | |
Net assets acquired(2) | 489 | |
| Total purchase price | $ | 6,101 | |
(1)Goodwill was recorded in the Google Cloud segment and primarily attributable to synergies expected to arise after the acquisition. Goodwill is not deductible for tax purposes is approximately $24 million.purposes.
Pro forma results(2)Includes $706 million of operations for these acquisitions have not been presented because they are not material to the consolidated results of operations, either individually or in aggregate.acquired cash.
For all intangibleIntangible assets acquired and purchased during the nine months ended September 30, 2017, patents and developed technology have a weighted-average useful life of 3.9 years, customer relationships have a weighted-average useful life of 3.1 years, and trade names and other have a weighted-average useful life of 8.8 years.
Note 8. Calico
In September 2013, we announced the formation of Calico, a life science company with a mission to harness advanced technologies to increase our understandingas of the biology that controls lifespan. As of September 30, 2017, we have contributed $240 million to Calico in exchange for Calico convertible preferred units and are committed to fund an additional $490 million on an as-needed basis.acquisition date were as follows:
Calico is a VIE and its results of operations and statement of financial position are included in our consolidated financial statements as we have the power to direct the activities that most significantly impact its economic performance. | | | | | | | | | | | |
| Amount
(in millions) | | Weighted-Average Useful Life
(in years) |
| Patents and developed technology | $ | 349 | | | 4.8 |
| Customer relationships | 366 | | | 8.0 |
| Trade names and other | 125 | | | 5.9 |
| Total intangible assets | $ | 840 | | | |
In September 2014, AbbVie Inc. (AbbVie) and Calico announced a research and development collaboration agreement intended to help both companies discover, develop, and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer. As of September 30, 2017, AbbVie has contributed $750 million to fund the collaboration pursuant to the agreement, which reflects its total commitment. As of September 30, 2017, Calico has contributed $250 million and committed up to an additional $500 million.Calico has used its scientific expertise to establish a world-class research and development facility, with a focus on drug discovery and early drug development; and AbbVie provides scientific and clinical development support and its commercial expertise to bring new discoveries to market. Both companies share costs and profits equally. AbbVie's contribution has been recorded as a liability on Calico's financial statements, which is reduced and reflected as a reduction to research and development expense as eligible research and development costs are incurred by Calico over the next few years.
Note 9. Verily
Verily is a life science company with a mission to make the world's health data useful so that people enjoy healthier lives. Verily is a VIE and its results of operations and statement of financial position are included in our consolidated financial statements as we have the power to direct the activities that most significantly impact its economic performance.
In January 2017, Temasek, a Singapore-based investment company, signed a binding commitment to purchase a noncontrolling interest in Verily for an aggregate of $800 million in cash. In the first quarter of 2017, the first tranche of the investment closed and we received $480 million. The second and final tranche of the investment closed in the third quarter of 2017 and we received the remaining $320 million. The transaction is accounted for as an equity transaction and no gain or loss was recognized. Of the $800 million received, $78 million was recorded as noncontrolling interest and $722 million was recorded as additional paid-in capital. Noncontrolling interest and net loss attributable to noncontrolling interest were not separately presented on our consolidated financial statements as of and for the three and nine months ended September 30, 2017 as the amounts were not material.
Note 10.8. Goodwill and Other Intangible Assets
Goodwill
The changesChanges in the carrying amount of goodwill allocated to our disclosed segments for the nine months ended September 30, 2017 were as follows (in millions, unaudited):
|
| | | | | | | | | | | |
| | Google | | Other Bets | | Total Consolidated |
| Balance as of December 31, 2016 | $ | 16,027 |
| | $ | 441 |
| | $ | 16,468 |
|
| Acquisitions | 196 |
| | 9 |
| | 205 |
|
| Foreign currency translation and other adjustments | 57 |
| | 1 |
| | 58 |
|
| Balance as of September 30, 2017 | $ | 16,280 |
| | $ | 451 |
| | $ | 16,731 |
|
Other Intangible Assets
Information regarding purchased intangible assets2022 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Google Services | | Google Cloud | | Other Bets | | Total |
| Balance as of December 31, 2021 | $ | 19,826 | | | $ | 2,337 | | | $ | 793 | | | $ | 22,956 | |
| Acquisitions | 1,146 | | | 4,875 | | | 113 | | | 6,134 | |
| Foreign currency translation and other adjustments | (227) | | | (23) | | | (6) | | | (256) | |
| Balance as of September 30, 2022 | $ | 20,745 | | | $ | 7,189 | | | $ | 900 | | | $ | 28,834 | |
|
| | | | | | | | | | | |
| | As of December 31, 2016 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Patents and developed technology | $ | 5,542 |
| | $ | 2,710 |
| | $ | 2,832 |
|
| Customer relationships | 352 |
| | 197 |
| | 155 |
|
| Trade names and other | 463 |
| | 143 |
| | 320 |
|
| Total | $ | 6,357 |
| | $ | 3,050 |
| | $ | 3,307 |
|
| | | | | | |
| | As of September 30, 2017 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | (unaudited) |
| Patents and developed technology | $ | 5,312 |
| | $ | 2,931 |
| | $ | 2,381 |
|
| Customer relationships | 358 |
| | 246 |
| | 112 |
|
| Trade names and other | 548 |
| | 158 |
| | 390 |
|
| Total | $ | 6,218 |
| | $ | 3,335 |
| | $ | 2,883 |
|
Information regarding purchased intangible assets was as follows (in millions): | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Patents and developed technology | $ | 4,786 | | | $ | 4,112 | | | $ | 674 | |
| Customer relationships | 506 | | | 140 | | | 366 | |
| Trade names and other | 534 | | | 295 | | | 239 | |
| Total definite-lived intangible assets | 5,826 | | | 4,547 | | | 1,279 | |
| Indefinite-lived intangible assets | 138 | | | 0 | | | 138 | |
| Total intangible assets | $ | 5,964 | | | $ | 4,547 | | | $ | 1,417 | |
| | | | | | | | | | | | | | | | | |
| As of September 30, 2022 |
| Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Patents and developed technology | $ | 1,364 | | | $ | 491 | | | $ | 873 | |
| Customer relationships | 891 | | | 224 | | | 667 | |
| Trade names and other | 528 | | | 110 | | | 418 | |
| Total definite-lived intangible assets | 2,783 | | | 825 | | | 1,958 | |
| Indefinite-lived intangible assets | 234 | | | 0 | | | 234 | |
| Total intangible assets | $ | 3,017 | | | $ | 825 | | | $ | 2,192 | |
For the nine months ended September 30, 2022, $4.2 billion of intangible assets that were fully amortized have been removed from gross intangible assets and accumulated amortization.
Amortization expense relating to purchased intangible assets was $203$219 million and $194$113 million for the three months ended September 30, 20162021 and 2017,2022, respectively, and $629$651 million and $600$505 million for the nine months ended September 30, 20162021 and 2017,2022, respectively.
Expected amortization expense related to purchased intangible assets held as of September 30, 2022 was as follows (in millions):
| | | | | |
| Remainder of 2022 | $ | 134 | |
| 2023 | 458 | |
| 2024 | 439 | |
| 2025 | 309 | |
| 2026 | 232 | |
| Thereafter | 386 | |
| Total | $ | 1,958 | |
Note 9. Contingencies
Indemnifications
In the normal course of business, including to facilitate transactions in our services and products and corporate activities, we indemnify certain parties, including advertisers, Google Network partners, customers of Google Cloud offerings, lessors, and service providers with respect to certain matters. We have agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. Several of these agreements limit the time within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our officers and directors, and our bylaws contain similar indemnification obligations to our agents.
It is not possible to make a reasonable estimate of the maximum potential amount under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement. Additionally, we have a limited history of prior indemnification claims and the payments we have made under such agreements have not had a material adverse effect on our results of operations, cash flows, or financial position. However, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our results of operations or cash flows in a particular period.
As of September 30, 2017, expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter are as follows (in millions, unaudited):
|
| | | |
| Remainder of 2017 | $ | 193 |
|
| 2018 | 726 |
|
| 2019 | 615 |
|
| 2020 | 493 |
|
| 2021 | 459 |
|
| Thereafter | 397 |
|
| | $ | 2,883 |
|
Note 11. Contingencies2022, we did not have any material indemnification claims that were probable or reasonably possible.
Legal Matters
Antitrust Investigations
On November 30, 2010, the European Commission's (EC)EC's Directorate General for Competition opened an investigation into various antitrust-related complaints against us.
On April 15, 2015, the EC issued a Statement of Objections (SO) regarding the display and ranking of shopping search results and ads, to which we responded on August 27, 2015. On July 14, 2016, the EC issued a Supplementary SO regarding shopping search results and ads. On June 27, 2017, the EC announced its decision that certain actions taken by Google regarding its display and ranking of shopping search results and ads infringed European competition law. The EC decision imposed a €2.42€2.4 billion (approximately $2.74($2.7 billion as of June 27, 2017) fine. On September 11, 2017, we appealed the EC decision to the General Court, and on September 27, 2017, we implemented product changes to bring shopping ads into compliance with the EC's decision. We recognized a charge of approximately $2.74$2.7 billion for the fine in the second quarter of 2017. On November 10, 2021, the General Court rejected our appeal, and we subsequently filed an appeal with the European Court of Justice on January 20, 2022.
On July 18, 2018, the EC announced its decision that certain provisions in Google’s Android-related distribution agreements infringed European competition law. The EC decision imposed a €4.3 billion ($5.1 billion as of June 30, 2018) fine and directed the termination of the conduct at issue. On October 9, 2018, we appealed the EC decision, and on October 29, 2018, we implemented changes to certain of our Android distribution practices. On September 14, 2022, the General Court rejected our appeal on three claims, accepted our appeal on one claim, and reduced the fine to €4.1 billion. We are preparing to appeal to the European Court of Justice. In the second quarter of 2018, we recognized a charge of $5.1 billion for the fine, which we reduced by $217 million in the third quarter of 2022.
On March 20, 2019, the EC announced its decision that certain contractual provisions in agreements that Google had with AdSense for Search partners infringed European competition law. The EC decision imposed a fine of €1.5 billion ($1.7 billion as of March 20, 2019) and directed actions related to AdSense for Search partners' agreements, which we implemented prior to the decision. On June 4, 2019, we appealed the EC decision, which remains pending. We recognized a charge of $1.7 billion for the fine in the first quarter of 2019.
While each EC decision is under appeal, we included the fines in accrued expenses and other current liabilities on our Consolidated Balance SheetSheets as we provided bank guarantees in(in lieu of a cash paymentpayment) for the fine.fines.
From time to time we are subject to formal and informal inquiries and investigations on various competition matters by regulatory authorities in the United States (U.S.), Europe, and other jurisdictions globally. For example:
•In August 2019, we began receiving civil investigative demands from the U.S. Department of Justice (DOJ) requesting information and documents relating to our prior antitrust investigations and certain aspects of our business. The DOJ and a number of state Attorneys General filed a lawsuit on October 20, 2020 alleging that Google violated U.S. antitrust laws relating to Search and Search advertising. Further, in June2022, the Australian Competition and Consumer Commission (ACCC) and the United Kingdom's Competition and Markets Authority (CMA) each opened an investigation into Search distribution practices.
•On April 20, 2016,December 16, 2020, a number of state Attorneys General filed an antitrust complaint in the U.S. District Court for the Eastern District of Texas, alleging that Google violated U.S. antitrust laws as well as state
deceptive trade laws relating to its advertising technology. The DOJ's investigation of similar issues remains ongoing. The EC, the CMA, and the ACCC each opened a formal investigation into Google's advertising technology business practices on June 22, 2021, May 25, 2022, and June 29, 2022, respectively.
•On July 7, 2021, a number of state Attorneys General filed an antitrust complaint in the U.S. District Court for the Northern District of California, alleging that Google’s operation of Android and Google Play violated U.S. antitrust laws and state antitrust and consumer protection laws. In May 2022, the EC issued an SO regarding certain Android distributionand the CMA each opened a formal investigation into Google Play’s business practices. On July 14, 2016,Korean regulators are investigating Google Play's billing practices, most recently opening a formal review in May 2022 of Google's compliance with the new app store billing regulations.
We believe these complaints are without merit and will defend ourselves vigorously. We continue to cooperate with federal and state regulators in the U.S., the EC, issued an SO regardingand other regulators around the syndication of AdSense for Search. We responded to the SOs and continue to respond to the EC's informational requests. There is significant uncertainty as to the outcomes of these investigations; however, adverse decisions could result in fines and directives to alter or terminate certain conduct. Given the nature of these cases, we are unable to estimate the reasonably possible loss or ranges of loss, if any. We remain committed to working with the EC to resolve these matters.
The Comision Nacional de Defensa de la Competencia in Argentina, the Competition Commission of India (CCI), Brazil's Council for Economic Defense (CADE), and the Korean Fair Trade Commission have also opened investigations into certain of our business practices. In November 2016, we responded to the CCI Director General's report with interim findings of competition law infringements regarding search and ads.world.
Patent and Intellectual Property Claims
We have had patent, copyright, trade secret, and trademark infringement lawsuits filed against us claiming that certain of our products, services, and technologies infringe theothers' intellectual property rights of others.rights. Adverse results in these lawsuits may include awards of substantial monetary damages, costly royalty or licensing agreements, or orders preventing us from offering certain features, functionalities, products, or services, andservices. As a result, we may also cause ushave to change our business practices and require development ofdevelop non-infringing products or technologies, which could result in a loss of revenues for us and otherwise harm our business. In addition, the U.S. International Trade Commission (ITC) has increasingly become an important forum to litigate intellectual property disputes because an ultimate loss for a company or its suppliers in an ITC action couldcan result in a prohibition on importing infringing products into the U.S. Because the U.S. is an important market, a prohibition on importation could have an adverse effect on us, including preventing us from importing many important products into the U.S. or necessitating workarounds that may limit certain features of our products.
Furthermore, many of our agreements with our customers and partners require us to indemnify them foragainst certain intellectual property infringement claims, against them, which would increase our costs as a result of defending such claims, and may require that we pay significant damages if there were an adverse ruling in any such claims. OurIn addition, our customers and partners may discontinue the use of our products, services, and technologies, as a result of injunctions or otherwise, which could result in loss of revenues and adversely impactaffect our business.
Oracle America, Inc. (Oracle) brought a copyright lawsuit against Google in the Northern District of California, alleging that Google's Android infringes Oracle's copyrights related to certain Java application programming interfaces. After trial, final judgment was entered by the district court in favor of Google on June 8, 2016, and the court decided post-trial motions in favor of Google. Oracle has appealed. We believe this lawsuit is without merit and are defending ourselves vigorously. Given the nature of this case, we are unable to estimate the reasonably possible loss or range of loss, if any, arising from this matter.
Other
We are also regularly subject to claims, suits, regulatory and government investigations, and other proceedings, and consent decrees involving competition, (such as the pending EC investigations described above), intellectual property, privacy and cybersecurity, tax and related compliance, labor and employment, commercial disputes, content generated by our users, goods and services offered by advertisers or publishers using our platforms, personal injury, consumer protection, and other matters. For example, we currently have a number of privacy investigations and suits ongoing in multiple jurisdictions. Such claims, suits, regulatory
and government investigations, and other proceedings, and consent decrees could result in substantial fines and penalties, injunctive relief, ongoing auditing and monitoring obligations, changes to our products and services, alterations to our business models and operations, and collateral related civil or criminal penalties,litigation or other adverse consequences.consequences, all of which could harm our business, reputation, financial condition, and operating results.
We have ongoing legal matters relating to Russia. For example, civil judgments that include compounding penalties have been imposed upon us in connection with disputes regarding the termination of accounts, including those of sanctioned parties. We do not believe these ongoing legal matters will have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.
Certain of our outstanding legal matters include speculative, claims for substantial or indeterminate amounts of damages.monetary amounts. We record a liability when we believe that it is probable that a loss has been incurred, and the amount can be reasonably estimated. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the reasonably possible loss. We evaluate on a monthly basis, developments in our legal matters that could affect the amount of liability that has been previously accrued, and the matters and related reasonably possible losses disclosed, and make adjustments as appropriate. Significant judgment is required to determine both the likelihood of there being and the estimated amount of a loss related to such matters.
With respect to our outstanding legal matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will not, either individually or in the aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties.
We expense legal fees in the period in which they are incurred.
Indirect Taxes and Other Non-Income Taxes
We are under audit by various domestic and foreign tax authorities with regards to indirect tax and other non-income tax matters. The subject matter of indirect tax and other non-income tax audits primarily arises from disputes on the tax treatment and tax rate applied to the sale of our products and services in these jurisdictions and the tax treatment of certain employee benefits. We accrue indirect taxes and other non-income taxes that may result from examinations by, or any negotiated agreements with, these tax authorities when a loss is probable and reasonably estimable. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the reasonably possible loss. We believe these matters are without merit and we are defending ourselves vigorously. Due to the inherent complexity and uncertainty of these matters and judicial process in certain jurisdictions, the final outcome may be materially different from our expectations.
For information regarding income tax contingencies, see Note 14.
13.
Note 12. Net Income Per Share10. Stockholders' Equity
The following table sets forthStock Split
On July 15, 2022, the computationcompany executed a 20-for-one stock split with a record date of basicJuly 1, 2022, effected in the form of a one-time special stock dividend on each share of the company's Class A, Class B, and diluted net incomeClass C stock. All prior period references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the effects of the Stock Split. See Note 1 for further details.
Share Repurchases
In April 2022, the Board of Directors of Alphabet authorized the company to repurchase up to $70.0 billion of its Class A and Class B common stock and Class C capital stock (in millions, except share amounts which are reflected in thousands, and per share amounts, unaudited):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2016 | | 2017 |
| | Class A | | Class B | | Class C | | Class A | | Class B | | Class C |
| Basic net income per share: | | | | | | | | | | | |
| Numerator | | | | | | | | | | | |
| Allocation of undistributed earnings | $ | 2,171 |
| | $ | 357 |
| | $ | 2,533 |
| | $ | 2,891 |
| | $ | 457 |
| | $ | 3,384 |
|
| Denominator | | | | | | | | | | | |
| Number of shares used in per share computation | 294,945 |
| | 48,513 |
| | 344,103 |
| | 297,804 |
| | 47,078 |
| | 348,603 |
|
| Basic net income per share | $ | 7.36 |
| | $ | 7.36 |
| | $ | 7.36 |
| | $ | 9.71 |
| | $ | 9.71 |
| | $ | 9.71 |
|
| Diluted net income per share: | | | | | | | | | | | |
| Numerator | | | | | | | | | | | |
| Allocation of undistributed earnings for basic computation | $ | 2,171 |
| | $ | 357 |
| | $ | 2,533 |
| | $ | 2,891 |
| | $ | 457 |
| | $ | 3,384 |
|
| Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares | 357 |
| | 0 |
| | 0 |
| | 457 |
| | 0 |
| | 0 |
|
| Reallocation of undistributed earnings | (25 | ) | | (5 | ) | | 25 |
| | (38 | ) | | (7 | ) | | 38 |
|
| Allocation of undistributed earnings | $ | 2,503 |
| | $ | 352 |
| | $ | 2,558 |
| | $ | 3,310 |
| | $ | 450 |
| | $ | 3,422 |
|
| Denominator | | | | | | | | | | | |
| Number of shares used in basic computation | 294,945 |
| | 48,513 |
| | 344,103 |
| | 297,804 |
| | 47,078 |
| | 348,603 |
|
| Weighted-average effect of dilutive securities | | | | | | | | | | | |
| Add: | | | | | | | | | | | |
| Conversion of Class B to Class A common shares outstanding | 48,513 |
| | 0 |
| | 0 |
| | 47,078 |
| | 0 |
| | 0 |
|
| Restricted stock units and other contingently issuable shares | 1,923 |
| | 0 |
| | 8,956 |
| | 1,070 |
| | 0 |
| | 9,161 |
|
| Number of shares used in per share computation | 345,381 |
| | 48,513 |
| | 353,059 |
| | 345,952 |
| | 47,078 |
| | 357,764 |
|
| Diluted net income per share | $ | 7.25 |
| | $ | 7.25 |
| | $ | 7.25 |
| | $ | 9.57 |
| | $ | 9.57 |
| | $ | 9.57 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2016 | | 2017 |
| | Class A | | Class B | | Class C | | Class A | | Class B | | Class C |
| Basic net income per share: | | | | | | | | | | | |
| Numerator | | | | | | | | | | | |
| Allocation of undistributed earnings | $ | 6,047 |
| | $ | 1,013 |
| | $ | 7,085 |
| | $ | 6,734 |
| | $ | 1,069 |
| | $ | 7,879 |
|
| Denominator | | | | | | | | | | | |
| Number of shares used in per share computation | 293,723 |
| | 49,214 |
| | 344,162 |
| | 297,291 |
| | 47,189 |
| | 347,853 |
|
| Basic net income per share | $ | 20.59 |
| | $ | 20.59 |
| | $ | 20.59 |
| | $ | 22.65 |
| | $ | 22.65 |
| | $ | 22.65 |
|
| Diluted net income per share: | | | | | | | | | | | |
| Numerator | | | | | | | | | | | |
| Allocation of undistributed earnings for basic computation | $ | 6,047 |
| | $ | 1,013 |
| | $ | 7,085 |
| | $ | 6,734 |
| | $ | 1,069 |
| | $ | 7,879 |
|
| Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares | 1,013 |
| | 0 |
| | 0 |
| | 1,069 |
| | 0 |
| | 0 |
|
| Reallocation of undistributed earnings | (68 | ) | | (16 | ) | | 68 |
| | (92 | ) | | (17 | ) | | 92 |
|
| Allocation of undistributed earnings | $ | 6,992 |
| | $ | 997 |
| | $ | 7,153 |
| | $ | 7,711 |
| | $ | 1,052 |
| | $ | 7,971 |
|
| Denominator | | | | | | | | | | | |
| Number of shares used in basic computation | 293,723 |
| | 49,214 |
| | 344,162 |
| | 297,291 |
| | 47,189 |
| | 347,853 |
|
| Weighted-average effect of dilutive securities | | | | | | | | | | | |
| Add: | | | | | | | | | | | |
| Conversion of Class B to Class A common shares outstanding | 49,214 |
| | 0 |
| | 0 |
| | 47,189 |
| | 0 |
| | 0 |
|
| Restricted stock units and other contingently issuable shares | 2,204 |
| | 0 |
| | 8,896 |
| | 1,255 |
| | 0 |
| | 9,497 |
|
| Number of shares used in per share computation | 345,141 |
| | 49,214 |
| | 353,058 |
| | 345,735 |
| | 47,189 |
| | 357,350 |
|
| Diluted net income per share | $ | 20.26 |
| | $ | 20.26 |
| | $ | 20.26 |
| | $ | 22.30 |
| | $ | 22.30 |
| | $ | 22.30 |
|
For the periods presented above, the net income per share amounts are the sameshares. As of September 30, 2022, $43.5 billion remains available for Class A and Class B common stockC share repurchases. Class A and Class C capital stock becauseshares are repurchased in a manner deemed in the holdersbest interest of each class are entitled to equal per share dividends or distributions in liquidation inthe company and its stockholders, taking into account the economic cost and prevailing market conditions, including the relative trading prices and volumes of the Class A and Class C shares.
In accordance with the Amended and Restated Certificateauthorization of Incorporationthe Board of Directors of Alphabet, Inc.during the three and nine months ended September 30, 2022, we repurchased and subsequently retired 138 million and 369 million aggregate shares for $15.4 billion and $43.9 billion, respectively. Of the aggregate amount repurchased and subsequently retired during the three months ended September 30, 2022, 25 million shares were Class A stock for $2.7 billion and 113 million shares were Class C stock for $12.7 billion. Of the aggregate amount repurchased and subsequently retired during the nine months ended September 30, 2022, 46 million shares were Class A stock for $5.2 billion and 323 million shares were Class C stock for $38.7 billion.
Repurchases are executed from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated transactions, including through Rule 10b5-1 plans. The repurchase program does not have an expiration date.
Note 13. Stockholders’ Equity11. Net Income Per Share
The following table sets forth the computation of basic and diluted net income per share of Class A, Class B, and Class C stock (in millions, except per share amounts): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| | 2021 | | 2022 |
| | Class A | | Class B | | Class C | | Class A | | Class B | | Class C |
| Basic net income per share: | | | | | | | | | | | |
| Numerator | | | | | | | | | | | |
| Allocation of undistributed earnings | $ | 8,548 | | | $ | 1,291 | | | $ | 9,097 | | | $ | 6,393 | | | $ | 946 | | | $ | 6,571 | |
| | | | | | | | | | | |
| Denominator | | | | | | | | | | | |
| Number of shares used in per share computation | 6,010 | | | 908 | | | 6,397 | | | 5,983 | | | 885 | | | 6,150 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Basic net income per share | $ | 1.42 | | | $ | 1.42 | | | $ | 1.42 | | | $ | 1.07 | | | $ | 1.07 | | | $ | 1.07 | |
| Diluted net income per share: | | | | | | | | | | | |
| Numerator | | | | | | | | | | | |
| | | | | | | | | | | |
| Allocation of undistributed earnings for basic computation | $ | 8,548 | | | $ | 1,291 | | | $ | 9,097 | | | $ | 6,393 | | | $ | 946 | | | $ | 6,571 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares | 1,291 | | | 0 | | | 0 | | | 946 | | | 0 | | | 0 | |
| Reallocation of undistributed earnings | (156) | | | (20) | | | 156 | | | (45) | | | (6) | | | 45 | |
| Allocation of undistributed earnings | $ | 9,683 | | | $ | 1,271 | | | $ | 9,253 | | | $ | 7,294 | | | $ | 940 | | | $ | 6,616 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Denominator | | | | | | | | | | | |
| Number of shares used in basic computation | 6,010 | | | 908 | | | 6,397 | | | 5,983 | | | 885 | | | 6,150 | |
| Weighted-average effect of dilutive securities | | | | | | | | | | | |
| Add: | | | | | | | | | | | |
| Conversion of Class B to Class A shares outstanding | 908 | | | 0 | | | 0 | | | 885 | | | 0 | | | 0 | |
| | | | | | | | | | | |
| Restricted stock units and other contingently issuable shares | 0 | | | 0 | | | 215 | | | 0 | | | 0 | | | 79 | |
| Number of shares used in per share computation | 6,918 | | | 908 | | | 6,612 | | | 6,868 | | | 885 | | | 6,229 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Diluted net income per share | $ | 1.40 | | | $ | 1.40 | | | $ | 1.40 | | | $ | 1.06 | | | $ | 1.06 | | | $ | 1.06 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| | 2021 | | 2022 |
| | Class A | | Class B | | Class C | | Class A | | Class B | | Class C |
| Basic net income per share: | | | | | | | | | | | |
| Numerator | | | | | | | | | | | |
| Allocation of undistributed earnings | $ | 24,867 | | | $ | 3,776 | | | $ | 26,748 | | | $ | 21,213 | | | $ | 3,137 | | | $ | 21,998 | |
| | | | | | | | | | | |
| Denominator | | | | | | | | | | | |
| Number of shares used in per share computation | 6,010 | | | 912 | | | 6,464 | | | 6,004 | | | 888 | | | 6,226 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Basic net income per share | $ | 4.14 | | | $ | 4.14 | | | $ | 4.14 | | | $ | 3.53 | | | $ | 3.53 | | | $ | 3.53 | |
| Diluted net income per share: | | | | | | | | | | | |
| Numerator | | | | | | | | | | | |
| | | | | | | | | | | |
| Allocation of undistributed earnings for basic computation | $ | 24,867 | | | $ | 3,776 | | | $ | 26,748 | | | $ | 21,213 | | | $ | 3,137 | | | $ | 21,998 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares | 3,776 | | | 0 | | | 0 | | | 3,137 | | | 0 | | | 0 | |
| Reallocation of undistributed earnings | (424) | | | (56) | | | 424 | | | (204) | | | (26) | | | 204 | |
| Allocation of undistributed earnings | $ | 28,219 | | | $ | 3,720 | | | $ | 27,172 | | | $ | 24,146 | | | $ | 3,111 | | | $ | 22,202 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Denominator | | | | | | | | | | | |
| Number of shares used in basic computation | 6,010 | | | 912 | | | 6,464 | | | 6,004 | | | 888 | | | 6,226 | |
| Weighted-average effect of dilutive securities | | | | | | | | | | | |
| Add: | | | | | | | | | | | |
| Conversion of Class B to Class A shares outstanding | 912 | | | 0 | | | 0 | | | 888 | | | 0 | | | 0 | |
| | | | | | | | | | | |
| Restricted stock units and other contingently issuable shares | 0 | | | 0 | | | 202 | | | 0 | | | 0 | | | 111 | |
| Number of shares used in per share computation | 6,922 | | | 912 | | | 6,666 | | | 6,892 | | | 888 | | | 6,337 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Diluted net income per share | $ | 4.08 | | | $ | 4.08 | | | $ | 4.08 | | | $ | 3.50 | | | $ | 3.50 | | | $ | 3.50 | |
For the periods presented above, the net income per share amounts are the same for Class A, Class B, and Class C stock because the holders of each class are entitled to equal per share dividends or distributions in liquidation in accordance with the Amended and Restated Certificate of Incorporation of Alphabet Inc.
Note 12. Compensation Plans
Stock-Based Compensation
For the three months ended September 30, 20162021 and 2017,2022, total stock-based compensation (SBC) expense was $1,902 million$3.9 billion and $1,881 million,$5.0 billion, including amounts associated with awards we expect to settle in Alphabet stock of $1,860 million$3.8 billion and $1,820 million, respectively. $4.8 billion, respectively. For the nine months ended September 30, 20162021 and 2017,2022, total stock-based compensationSBC expense was $4,912 million$11.7 billion and $6,008 million,$14.4 billion, including amountsamounts associated with awards we expect to settle in Alphabet stock of $4,857 millionof $11.2 billion and $5,832 million, respectively.$13.8 billion, respectively.
Stock-Based Award Activities
The following table summarizes the activities for our unvested Alphabet restricted stock units (RSUs) for the nine months ended September 30, 2017 (unaudited)2022 (in millions, except per share amounts): |
| | | | | | |
| | Unvested Restricted Stock Units |
| | Number of
Shares | | Weighted-
Average
Grant-Date
Fair Value |
| Unvested as of December 31, 2016 | 25,348,955 |
| | $ | 624.92 |
|
| Granted | 7,246,476 |
| | $ | 826.60 |
|
| Vested | (9,112,936 | ) | | $ | 610.82 |
|
| Forfeited/canceled | (1,029,398 | ) | | $ | 651.68 |
|
| Unvested as of September 30, 2017 | 22,453,097 |
| | $ | 694.86 |
|
| | | | | | | | | | | |
| | Unvested Restricted Stock Units |
| | Number of
Shares | | Weighted-
Average
Grant-Date
Fair Value |
| Unvested as of December 31, 2021 | 338 | | | $ | 81.31 | |
| Granted | 199 | | | $ | 131.77 | |
| Vested | (152) | | | $ | 87.13 | |
| Forfeited/canceled | (25) | | | $ | 96.04 | |
| Unvested as of September 30, 2022 | 360 | | | $ | 105.70 | |
As of September 30, 2017,2022, there was $14.0$35.7 billion of unrecognized compensation cost related to unvested employee RSUs. This amount is expected to be recognized over a weighted-average period of 2.52.7 years.
Share Repurchases
In October 2016, the board of directors of Alphabet authorized the company to repurchase up to $7,019,340,976.83 of its Class C capital stock. The repurchases are being executed from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated transactions, including through Rule 10b5-1 plans. The repurchase program does not have an expiration date. In the nine months ended September 30, 2017, we repurchased and subsequently retired 3.1 million shares of Alphabet Class C capital stock for an aggregate amount of $2.7 billion.Note 14. 13. Income Taxes
The following table presents provision for income taxes (in millions, except for effective tax rate):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
| Income before provision for income taxes | $ | 23,064 | | | $ | 16,233 | | | $ | 66,332 | | | $ | 54,181 | |
| Provision for income taxes | $ | 4,128 | | | $ | 2,323 | | | $ | 10,941 | | | $ | 7,833 | |
| Effective tax rate | 17.9 | % | | 14.3 | % | | 16.5 | % | | 14.5 | % |
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Our totalTotal gross unrecognized tax benefits were $5.4$5.2 billion and $5.1$6.3 billion as of December 31, 20162021 and September 30, 2017,2022, respectively. Our totalTotal unrecognized tax benefits that, if recognized, would affect our effective tax rate were $4.3$3.7 billion and $3.9$4.6 billion as of December 31, 20162021 and September 30, 2017,2022, respectively.
Our effective tax rate is lower than the U.S. statutory rate primarily because of more earnings realized in countries that have lower statutory tax rates. Our effective tax rate in the future will depend on the portion of our profits earned within and outside the United States.
In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service (IRS) and other domestic and foreign tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. We continue to monitor the progress of ongoing discussions with tax authorities and the impact, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with management's expectations, we could be required to adjust the provision for income taxes in the period such resolution occurs.
We have received tax assessments in multiple foreign jurisdictions asserting transfer pricing adjustments or permanent establishment. We continue to defend against any and all such claims as presented. While we believe it is more likely than not that our tax position will be sustained, it is reasonably possible that we will have future obligations related to these matters.
For information regarding indirect taxes and other non-income taxes, see Note 11.9.
Note 15.14. Information about Segments and Geographic Areas
We operatereport our business in multiple operating segments.segment results as Google is our only reportable segment. None of our other segments meet the quantitative thresholds to qualify as reportable segments; therefore, the other operating segments are combinedServices, Google Cloud, and disclosed below as Other Bets.Bets:
Our reported segments are described below:
•Google – GoogleServices includes our main internet products and services such as Search, Ads, Commerce, Maps, YouTube, Google Cloud,ads, Android, Chrome, andhardware, Google Maps, Google Play, as well as our hardware initiatives. Our technical infrastructureSearch, and some newer efforts like virtual reality are also included in Google.YouTube. Google Services generates revenues primarily from advertising; sales of apps and in-app purchases, digital content products, and digital content;hardware; and fees received for subscription-based products such as YouTube Premium and YouTube TV.
•Google Cloud includes Google’s infrastructure and platform services, collaboration tools, and other services for enterprise customers. Google Cloud generates revenues from fees received for cloud offerings;Google Cloud Platform services, Google Workspace collaboration tools, and sales of hardware products.
other enterprise services.Other Bets – •Other Bets is a combination of multiple operating segments that are not individually material. Other Bets includes businesses such as Access, Calico, CapitalG, GV, Nest, Verily, Waymo, and X. Revenues from the Other Bets are derivedgenerated primarily throughfrom the salessale of health technology and internet and TV services through Google Fiber, sales of Nest products and services, and licensing and R&D services through Verily.
services.Revenues, cost of revenues,certain costs, such as costs associated with content and traffic acquisition, certain engineering activities, and hardware, as well as certain operating expenses are generally directly attributedattributable to our segments. Inter-segment revenuesDue to the integrated nature of Alphabet, other costs and expenses, such as technical infrastructure and office facilities, are managed centrally at a consolidated level. The associated costs, including depreciation and impairment, are allocated to operating segments as a service cost generally based on usage or headcount.
Unallocated corporate costs primarily include corporate initiatives, corporate shared costs, such as finance and legal, including certain fines and settlements, as well as costs associated with certain shared R&D activities. Additionally, hedging gains (losses) related to revenue are included in corporate costs.
Our operating segments are not presented separately, as these amounts are immaterial. Our Chief Operating Decision Maker does not evaluate operating segmentsevaluated using asset information. Prior period segment
The following table presents information has been recast to conform to the current period segment presentation.about our segments (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| | 2021 | | 2022 | | 2021 | | 2022 |
| Revenues: | | | | | | | |
| Google Services | $ | 59,884 | | | $ | 61,377 | | | $ | 168,129 | | | $ | 185,690 | |
| Google Cloud | 4,990 | | | 6,868 | | | 13,665 | | | 18,965 | |
| Other Bets | 182 | | | 209 | | | 572 | | | 842 | |
| Hedging gains (losses) | 62 | | | 638 | | | (54) | | | 1,291 | |
| Total revenues | $ | 65,118 | | | $ | 69,092 | | | $ | 182,312 | | | $ | 206,788 | |
32
Information about segments during the periods presented were as follows (in millions, unaudited):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Revenues: | | | | | | | |
| Google | $ | 22,254 |
| | $ | 27,470 |
| | $ | 63,661 |
| | $ | 77,738 |
|
| Other Bets | 197 |
| | 302 |
| | 547 |
| | 794 |
|
| Total revenues | $ | 22,451 |
| | $ | 27,772 |
| | $ | 64,208 |
| | $ | 78,532 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Operating income (loss): | | | | | | | |
| Google | $ | 6,774 |
| | $ | 8,744 |
| | $ | 20,009 |
| | $ | 24,145 |
|
| Other Bets | (861 | ) | | (812 | ) | | (2,490 | ) | | (2,439 | ) |
Reconciling items(1) | (146 | ) | | (150 | ) | | (442 | ) | | (3,224 | ) |
| Total income from operations | $ | 5,767 |
| | $ | 7,782 |
| | $ | 17,077 |
| | $ | 18,482 |
|
| | | | | |
| Reconciling items are primarily comprised of the European Commission fine for the nine months ended September 30, 2017, as well as corporate administrative costs and other miscellaneous items that are not allocated to individual segments for all periods presented.Alphabet Inc. |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Capital expenditures: | | | | | | | |
| Google | $ | 2,434 |
| | $ | 3,559 |
| | $ | 6,529 |
| | $ | 8,800 |
|
| Other Bets | 324 |
| | 77 |
| | 881 |
| | 398 |
|
Reconciling items(2) | (204 | ) | | (98 | ) | | (276 | ) | | (321 | ) |
| Total capital expenditures as presented on the Consolidated Statements of Cash Flows | $ | 2,554 |
| | $ | 3,538 |
| | $ | 7,134 |
| | $ | 8,877 |
|
| |
(2)
| Reconciling items are related to timing differences of payments as segment capital expenditures are on accrual basis while total capital expenditures shown on the Consolidated Statements of Cash Flow are on cash basis and other miscellaneous differences. |
Stock-based compensation (SBC) and depreciation, amortization, and impairment are included in segment operating income (loss) as shown below (in millions, unaudited):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Stock-based compensation: | | | | | | | |
| Google | $ | 1,629 |
| | $ | 1,654 |
| | $ | 4,273 |
| | $ | 5,362 |
|
| Other Bets | 199 |
| | 130 |
| | 486 |
| | 355 |
|
Reconciling items(3) | 32 |
| | 36 |
| | 98 |
| | 115 |
|
Total stock-based compensation(4) | $ | 1,860 |
| | $ | 1,820 |
| | $ | 4,857 |
| | $ | 5,832 |
|
| | | | | | | | |
| Depreciation, amortization, and impairment: | | | | | | | |
| Google | $ | 1,488 |
| | $ | 1,667 |
| | $ | 4,214 |
| | $ | 4,606 |
|
| Other Bets | 104 |
| | 94 |
| | 239 |
| | 283 |
|
Reconciling items(5) | 4 |
| | 0 |
| | 4 |
| | 0 |
|
| Total depreciation, amortization, and impairment as presented on the Consolidated Statements of Cash Flows | $ | 1,596 |
| | $ | 1,761 |
| | $ | 4,457 |
| | $ | 4,889 |
|
| |
(3)
| Reconciling items represent corporate administrative costs that are not allocated to individual segments. |
| |
(4)
| For purposes of segment reporting, SBC represents awards that we expect to settle in Alphabet stock. |
| |
(5)
| Reconciling items are primarily related to corporate administrative costs and other miscellaneous items that are not allocated to individual segments. |
The following table presents our long-lived assets by geographic area (in millions):
|
| | | | | | | |
| | As of
December 31, 2016 | | As of
September 30, 2017 |
| | | | (unaudited) |
| Long-lived assets: | | | |
| United States | $ | 47,383 |
| | $ | 53,051 |
|
| International | 14,706 |
| | 17,140 |
|
| Total long-lived assets | $ | 62,089 |
| | $ | 70,191 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| | 2021 | | 2022 | | 2021 | | 2022 |
| Operating income (loss): | | | | | | | |
| Google Services | $ | 23,973 | | | $ | 19,781 | | | $ | 65,862 | | | $ | 65,471 | |
| Google Cloud | (644) | | | (699) | | | (2,209) | | | (2,488) | |
| Other Bets | (1,288) | | | (1,611) | | | (3,831) | | | (4,452) | |
| Corporate costs, unallocated | (1,010) | | | (336) | | | (2,993) | | | (1,849) | |
| Total income from operations | $ | 21,031 | | | $ | 17,135 | | | $ | 56,829 | | | $ | 56,682 | |
For revenues by geography, see Note 2.
The following table presents long-lived assets by geographic area, which includes property and equipment, net and operating lease assets (in millions): | | | | | | | | | | | |
| As of
December 31, 2021 | | As of
September 30, 2022 |
| Long-lived assets: | | | |
| United States | $ | 80,207 | | | $ | 91,632 | |
| International | 30,351 | | | 30,408 | |
| Total long-lived assets | $ | 110,558 | | | $ | 122,040 | |
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Please read the following discussion and analysis of our financial condition and results of operations together with "Note About Forward-Looking Statements" and our consolidated financial statements and related notes included under Item 1 of this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, including Part I, Item 1A "Risk Factors."
Understanding Alphabet’s Financial Results
Alphabet is a collection of businesses — the largest of which is Google. We report Google in two segments, Google Services and Google Cloud; we also report all non-Google businesses collectively as Other Bets. Other Bets include earlier stage technologies that are further afield from our core Google business. For further details on our segments, see Note 14 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
Executive Overview of Results
Below are our key financial results for the three months ended September 30, 2017 (consolidated unless otherwise noted):
Revenues of $27.8 billion and revenue growth of 24% year over year, constant currency revenue growth of 24% year over year.
Google segment revenues of $27.5 billion with revenue growth of 23% year over year and Other Bets revenues of $0.3 billion with revenue growth of 53% year over year.
Revenues from the United States, EMEA, APAC, and Other Americas were $12.9 billion, $9.1 billion, $4.2 billion, and $1.5 billion, respectively.
Cost of revenues was $11.1 billion, consisting of traffic acquisition costs of $5.5 billionSeasonality and other cost of revenues of $5.6 billion.
Our traffic acquisition costs as a percentage of advertising revenues was 23%.
Operating expenses (excluding cost of revenues) were $8.8 billion.
Income from operations was $7.8 billion.
Effective tax rate was 16%.
Net income was $6.7 billion with diluted net income per share of $9.57.
Operating cash flow was $9.9 billion.
Capitalare affected by seasonal fluctuations in internet usage, advertising expenditures, were $3.5 billion.
Headcount increased to 78,101 as of September 30, 2017.
Information about Segments
We operate ourand underlying business in multiple operating segments. Google is our only reportable segment. None of our other segments meet the quantitative thresholds to qualify as reportable segments; therefore, the other operating segments are combined and disclosed below as Other Bets.
Our reported segments are described below:
Google – Google includes our main internet productstrends, such as Search, Ads, Commerce, Maps, YouTube,traditional retail seasonality. Additionally, our non-advertising revenues, including those generated from Google Cloud, Android, Chrome,Google Play, hardware, and Google PlayYouTube, may be affected by fluctuations driven by changes in pricing, digital content releases, fee structures, new product and service launches, and other market dynamics, as well as our hardware initiatives. Our technical infrastructureseasonality.
Revenues and some newer efforts like virtual realityMonetization Metrics
Google Services
Google Services revenues consist of revenues generated from advertising (“Google advertising”) as well as revenues from other sources (“Google other revenues”).
Google Advertising
Google advertising revenues are also included in Google. Google generates revenues primarily from advertising; sales of apps, in-app purchases, and digital content; services fees for cloud offerings; and sales of hardware products.
Other Bets – Other Bets is a combination of multiple operating segments that are not individually material. Other Bets includes businesses such as Access, Calico, CapitalG, GV, Nest, Verily, Waymo, and X. Revenues from the Other Bets are derived primarily through the sales of internet and TV services through Google Fiber, sales of Nest products and services, and licensing and R&D services through Verily.
See Note 15comprised of the Notes to Consolidated Financial Statements includedfollowing:
•Google Search & other, which includes revenues generated on Google search properties (including revenues from traffic generated by search distribution partners who use Google.com as their default search in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. Prior period segment information has been recast to conform to the current period segment presentation.
Revenues
The following table presents our revenues, by segment and revenue source (in millions, unaudited):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Google segment | | | | | | | |
| Google properties revenues | $ | 16,089 |
| | $ | 19,723 |
| | $ | 45,817 |
| | $ | 55,551 |
|
| Google Network Members' properties revenues | 3,732 |
| | 4,342 |
| | 11,167 |
| | 12,597 |
|
| Google advertising revenues | 19,821 |
| | 24,065 |
| | 56,984 |
| | 68,148 |
|
| Google other revenues | 2,433 |
| | 3,405 |
| | 6,677 |
| | 9,590 |
|
| Google segment revenues | 22,254 |
| | 27,470 |
| | 63,661 |
| | 77,738 |
|
| | | | | | | | |
| Other Bets | | | | | | | |
| Other Bets revenues | 197 |
| | 302 |
| | 547 |
| | 794 |
|
| | | | | | | | |
| Revenues | $ | 22,451 |
| | $ | 27,772 |
| | $ | 64,208 |
| | $ | 78,532 |
|
Google segment
The following table presents our Google segment revenues (in millions, unaudited)browsers, toolbars, etc.), and changesother Google owned and operated properties like Gmail, Google Maps, and Google Play;
•YouTube ads, which includes revenues generated on YouTube properties; and
•Google Network, which includes revenues generated on Google Network properties participating in AdMob, AdSense, and Google Ad Manager.
We use certain metrics to track how well traffic across various properties is monetized as it relates to our aggregateadvertising revenues: paid clicks and cost-per-click (expressed as a percentage):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Google segment revenues | $ | 22,254 |
| | $ | 27,470 |
| | $ | 63,661 |
| | $ | 77,738 |
|
| Google segment revenues as a percentage of total revenues | 99.1 | % | | 98.9 | % | | 99.1 | % | | 99.0 | % |
| Aggregate paid clicks change | | | 47 | % | | | | 48 | % |
| Aggregate cost-per-click change | | | (18 | )% | | | | (20 | )% |
Use of Monetization Metrics
When assessingpertain to traffic on Google Search & other properties, while impressions and cost-per-impressions pertain to traffic on our advertising revenue performance, we present information regarding the percentage change in the number of "paid clicks" and "cost-per-click" for our Google properties and Google Network Members'partners’ properties. Management views these as important metrics for understanding our business.
Paid clicks for our Google properties represent engagement by users and include clicks on advertisements by end-users related to searches on Google.com, clicks related to advertisements onGoogle search properties and other Google owned and operated properties including Gmail, Google Maps, and Google Play; and viewed YouTube engagement ads like TrueView (counted as an engagement when the user chooses not to skip the ad). Paid clicks for our Google Network Members' properties include clicks by end-users related to advertisements served on Google Network Members' properties participating in AdSense for Search, AdSense for Content, and AdMob. In some cases, such as programmatic and reservation based advertising buying, we primarily charge advertisers by impression; while growing, this represents a small part of our revenue base.
Play. Cost-per-click is defined as click-driven revenues divided by our total number of paid clicks and represents the average amount we charge advertisers for each engagement by users.
WeImpressions include impressions displayed to users on Google Network properties participating primarily in AdMob, AdSense, and Google Ad Manager. Cost-per-impression is defined as impression-based and click-based revenues divided by our total number of impressions, and represents the average amount we charge advertisers for each impression displayed to users.
As our business evolves, we periodically review, refine, and update our methodologies for monitoring, gathering, and counting the number of paid clicks and the number of impressions, and for identifying the revenues generated by the corresponding click and impression activity.
In the first quarter of 2017, we refined our methodology for paid clicks and cost-per-click to include additional categories of TrueView engagement ads and exclude non-engagement based trial ad formats. This change resulted in a modest increase in paid clicks and a modest decrease in cost-per-click. For comparison purposes, we have included updated data for historical periods in the table below:
|
| | | | | | | | | | | |
| | Three Months Ended |
| | Mar 31, 2016 | | Jun 30, 2016 | | Sep 30, 2016 | | Dec 31, 2016 |
| Year-over-year change | | | | | | | |
| Aggregate paid clicks | 29 | % | | 28 | % | | 32 | % | | 39 | % |
| Paid clicks on Google properties | 38 | % | | 36 | % | | 41 | % | | 47 | % |
| Paid clicks on Google Network Members' properties | 2 | % | | 0 | % | | 1 | % | | 7 | % |
| | | | | | | | |
| Aggregate cost-per-click | (8 | )% | | (6 | )% | | (10 | )% | | (17 | )% |
| Cost-per-click on Google properties | (11 | )% | | (8 | )% | | (12 | )% | | (18 | )% |
| Cost-per-click on Google Network Members' properties | (8 | )% | | (8 | )% | | (14 | )% | | (19 | )% |
| | | | | | | | |
| Quarter-over-quarter change | | | | | | | |
| Aggregate paid clicks | (2 | )% | | 7 | % | | 9 | % | | 22 | % |
| Paid clicks on Google properties | (3 | )% | | 9 | % | | 11 | % | | 25 | % |
| Paid clicks on Google Network Members' properties | 4 | % | | (3 | )% | | 1 | % | | 6 | % |
| | | | | | | | |
| Aggregate cost-per-click | (1 | )% | | (1 | )% | | (5 | )% | | (10 | )% |
| Cost-per-click on Google properties | 1 | % | | (2 | )% | | (6 | )% | | (12 | )% |
| Cost-per-click on Google Network Members' properties | (12 | )% | | (2 | )% | | (6 | )% | | 0 | % |
Our advertising revenue growth and the change in advertising revenue growth, as well as the change in paid clicks and cost-per-click on Google Search & other properties and the change in impressions and cost-per-impression on Google Network Members' properties and the correlation between these items, have fluctuatedbeen affected and may continue to fluctuate because ofbe affected by various factors, including:
growth rates of revenues from Google properties, including YouTube, compared to growth rates of revenues from Google Network Members' properties;
•advertiser competition for keywords;
•changes in advertising quality, formats, delivery or policy;
•changes in device mix;
•changes in foreign currency exchange rates;
seasonality;
the •fees advertisers are willing to pay based on how they manage their advertising costs;
changes in advertising quality or formats;•general economic conditions and various external dynamics, including the effect of COVID-19, geopolitical events, regulations and other measures;
changes in device mix;•seasonality; and
•traffic growth in emerging markets compared to more mature markets and across various advertising verticals and channels;channels.
a shiftGoogle Other
Google other revenues are comprised of the following:
•Google Play, which includes sales of apps and in-app purchases and digital content sold in the proportionGoogle Play store;
•Devices and Services, which includes sales of non-clickhardware, including Fitbit wearable devices, Google Nest home products, and Pixel phones;
•YouTube non-advertising, which includes YouTube Premium and YouTube TV subscriptions; and
•other products and services.
Google Cloud
Google Cloud revenues are comprised of the following:
•Google Cloud Platform, which includes fees for infrastructure, platform, and other services;
•Google Workspace, which includes fees for cloud-based collaboration tools for enterprises, such as Gmail, Docs, Drive, Calendar and Meet; and
•other enterprise services.
Other Bets
Revenues from Other Bets are generated primarily from the sale of health technology and internet services.
For further details on how we recognize revenue, see Note 1 of the Notes to Consolidated Financial Statements included in Part II, Item 8 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Costs and Expenses
Our cost structure has two components: cost of revenues and operating expenses. Our operating expenses include costs related to R&D, sales and marketing, and general and administrative functions. Certain of these expenses, including those associated with the operation of our technical infrastructure as well as components of our operating expenses, are generally less variable in nature and may not correlate to the changes in revenue.
Cost of Revenues
Cost of revenues is comprised of TAC and other costs of revenues.
•TAC includes:
◦Amounts paid to our distribution partners who make available our search access points and services. Our distribution partners include browser providers, mobile carriers, original equipment manufacturers, and software developers.
◦Amounts paid to Google Network partners primarily for ads displayed on their properties.
•Other cost of revenues includes:
◦Content acquisition costs, which are payments to content providers from whom we license video and other content for distribution on YouTube and Google Play (we pay fees to these content providers based on revenues generated or a flat fee).
◦Expenses associated with our data centers (including bandwidth, compensation expenses, depreciation, energy, and other equipment costs) as well as other operations costs (such as content review as well as customer and product support costs).
◦Inventory and other costs related to the hardware we sell ("hardware costs").
The cost of revenues as a percentage of revenues generated from ads placed on Google Network properties andare significantly higher than the cost of revenues as a percentage of revenues generated from ads placed on Google Search & other properties, because most of the advertiser revenues from ads served on Google Network Members' properties including an increase in programmaticare paid as TAC to our Google Network partners.
Operating Expenses
Operating expenses are generally incurred during our normal course of business, which we categorize as either R&D, sales and reservation based advertising buying;marketing, or general and administrative.
general economic conditions.
Our advertising revenue growth rate has fluctuated over time as a result of a number of factors, including increasing competition, query growth rates, challenges in maintaining our growth rate as our revenues increase to higher levels, the evolution of the online advertising market, our investments in new business strategies, changes in our product mix, and shifts in the geographic mixThe main components of our revenues. We also expect thatR&D expenses are:
•compensation expenses for engineering and technical employees responsible for R&D related to our revenue growth rate will continueexisting and new products and services;
•depreciation; and
•professional services fees primarily related to be affected by evolving user preferences, the acceptance by usersconsulting and outsourcing services.
The main components of our sales and marketing expenses are:
•compensation expenses for employees engaged in sales and marketing, sales support, and certain customer service functions; and
•spending relating to our advertising and promotional activities in support of our products and services.
The main components of our general and administrative expenses are:
•compensation expenses for employees in finance, human resources, information technology, legal, and other administrative support functions;
•expenses related to legal matters, including fines and settlements; and
•professional services fees, including audit, consulting, outside legal, and outsourcing services.
Other Income (Expense), Net
Other income (expense), net primarily consists of interest income (expense), the effect of foreign currency exchange gains (losses), net gains (losses) and impairment on our marketable and non-marketable securities, performance fees, and income (loss) and impairment from our equity method investments.
For additional details, including how we account for our investments and factors that can drive fluctuations in the value of our investments, see Note 1 of the Notes to Consolidated Financial Statements included in Part II, Item 8 and Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as theywell as Note 3 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
Provision for Income Taxes
Provision for income taxes represents the estimated amount of federal, state, and foreign income taxes incurred in the U.S. and the many jurisdictions in which we operate. The provision includes the effect of reserve provisions and changes to reserves that are deliveredconsidered appropriate as well as the related net interest and penalties.
For additional details, see Note 1 of the Notes to Consolidated Financial Statements included in Part II, Item 8 in our Annual Report on diverseForm 10-K for the fiscal year ended December 31, 2021 as well as Note 13 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
Executive Overview
The following table summarizes consolidated financial results (in millions, except per share information, percentages, and number of employees): | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| September 30, | | | | |
| | 2021 | | 2022 | | $ Change | | % Change |
| Consolidated revenues | | $ | 65,118 | | | $ | 69,092 | | | $ | 3,974 | | | 6 | % |
| Change in consolidated constant currency revenues | | | | | | | | 11 | % |
| | | | | | | | |
| Cost of revenues | | $ | 27,621 | | | $ | 31,158 | | | $ | 3,537 | | | 13 | % |
| Operating expenses | | $ | 16,466 | | | $ | 20,799 | | | $ | 4,333 | | | 26 | % |
| | | | | | | | |
| Operating income | | $ | 21,031 | | | $ | 17,135 | | | $ | (3,896) | | | (19) | % |
| Operating margin | | 32 | % | | 25 | % | | | | (7) | % |
| | | | | | | | |
| Other income (expense), net | | $ | 2,033 | | | $ | (902) | | | $ | (2,935) | | | (144) | % |
| | | | | | | | |
| Net Income | | $ | 18,936 | | | $ | 13,910 | | | $ | (5,026) | | | (27) | % |
| Diluted EPS | | $ | 1.40 | | | $ | 1.06 | | | $ | (0.34) | | | (24) | % |
| | | | | | | | |
| Number of Employees | | 150,028 | | | 186,779 | | 36,751 | | 24 | % |
| | | | | | | | |
| | | | | | | | |
•Revenues were $69.1 billion, an increase of 6% year over year, primarily driven by an increase in Google Cloud segment revenues of $1.9 billion, or 38%, and an increase in Google Services segment revenues of $1.5 billion, or 2%. Hedging gains contributed approximately one percentage point to consolidated revenue growth.
•Total constant currency revenues, which exclude the effect of hedging, increased 11% year over year reflecting the strengthening of the U.S. dollar.
•Cost of revenues was $31.2 billion, an increase of 13% year over year, primarily driven by an increase in other costs of revenues.
•Operating expenses were $20.8 billion, an increase of 26% year over year, primarily driven by increases in compensation expenses due to headcount growth and advertising and promotional expenses.
Other information
•On September 12, 2022 we closed the acquisition of Mandiant for a total purchase price of $6.1 billion and added over 2,600 employees. Mandiant's financial results are reported within Google Cloud as of the acquisition date. See Note 7 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information.
•Beginning in the first quarter of 2022, we suspended the vast majority of our commercial activities in Russia and effectively ceased business activities of our Russian entity. The ongoing effect of these direct actions on our financial results was not material. The broader economic effects resulting from the war in Ukraine on our future financial results may be unpredictable.
•Repurchases of Class A and Class C shares were $15.4 billion for the three months ended September 30, 2022. See Note 10 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information.
•Operating cash flow was $23.4 billion for the three months ended September 30, 2022.
•Capital expenditures of $7.3 billion for the three months ended September 30, 2022 primarily relate to investments in technical infrastructure.
Financial Results
Revenues
The following table presents revenues by type (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| | 2021 | | 2022 | | 2021 | | 2022 |
| Google Search & other | $ | 37,926 | | | $ | 39,539 | | | $ | 105,650 | | | $ | 119,846 | |
| YouTube ads | 7,205 | | | 7,071 | | | 20,212 | | | 21,280 | |
| Google Network | 7,999 | | | 7,872 | | | 22,396 | | | 24,305 | |
| Google advertising | 53,130 | | | 54,482 | | | 148,258 | | | 165,431 | |
| Google other | 6,754 | | | 6,895 | | | 19,871 | | | 20,259 | |
| Google Services total | 59,884 | | | 61,377 | | | 168,129 | | | 185,690 | |
| Google Cloud | 4,990 | | | 6,868 | | | 13,665 | | | 18,965 | |
| Other Bets | 182 | | | 209 | | | 572 | | | 842 | |
| Hedging gains (losses) | 62 | | | 638 | | | (54) | | | 1,291 | |
| Total revenues | $ | 65,118 | | | $ | 69,092 | | | $ | 182,312 | | | $ | 206,788 | |
Google Services
Google advertising revenues
Google Search & other
Google Search & other revenues increased $1.6 billion and $14.2 billion from the three and nine months ended September 30, 2021 to the three and nine months ended September 30, 2022, respectively. The overall growth was driven by interrelated factors including increases in search queries resulting from growth in user adoption and usage, primarily on mobile devices, our ability to create a seamless experience for both usersgrowth in advertiser spending, and advertisers,improvements we have made in ad formats and movements indelivery. Growth was partially offset by the unfavorable effect of foreign currency exchange rates.
YouTube ads
YouTube ads revenues decreased $134 million from the three months ended September 30, 2021 to the three months ended September 30, 2022, as the unfavorable effect of foreign currency exchange rates more than offset growth in our brand and direct response advertising products.
YouTube ads revenues increased $1.1 billion from the nine months ended September 30, 2021 to the nine months ended September 30, 2022. The growth was driven by our brand and direct response advertising products, both of which benefited from increased spending by our advertisers as well as improvements to ad formats and delivery. Growth was partially offset by the unfavorable effect of foreign currency exchange rates.
Google propertiesNetwork
Google Network revenues decreased $127 million from the three months ended September 30, 2021 to the three months ended September 30, 2022, as the unfavorable effect of foreign currency exchange rates more than offset strength in AdSense.
Google Network revenues increased $1.9 billion from the nine months ended September 30, 2021 to the nine months ended September 30, 2022. The growth was primarily driven by strength in AdSense and AdMob, partially offset by the unfavorable effect of foreign currency exchange rates.
Monetization Metrics
Paid clicks and cost-per-click
The following table presents our Google properties revenues (in millions, unaudited), andyear-over-year changes in our paid clicks and cost-per-click (expressed as a percentage): | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| |
| | 2022 | | 2022 |
| | | |
| | | |
| Paid clicks change | 8% | | 12% |
| Cost-per-click change | (5)% | | 1% |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Google properties revenues | $ | 16,089 |
| | $ | 19,723 |
| | $ | 45,817 |
| | $ | 55,551 |
|
| Google properties revenues as a percentage of Google segment revenues | 72.3 | % | | 71.8 | % | | 72.0 | % | | 71.5 | % |
| Paid clicks change | | | 55 | % | | | | 57 | % |
| Cost-per-click change | | | (21 | )% | | | | (22 | )% |
Google properties revenues consist primarily of advertising revenues that are generated on:
Google search properties which includes revenues from traffic generated by search distribution partners who use Google.com as their default search in browsers, toolbars, etc.;
Other Google owned and operated properties like Gmail, Google Maps, and Google Play; and
YouTube, including but not limited to, YouTube TrueView and Google Preferred.
Our Google properties revenues increased $3,634 million from the three months ended September 30, 2016 to the three months ended September 30, 2017. The growth was primarily driven by increases in mobile search resulting from ongoing growth in user adoption and usage, as well as continued growth in advertiser activity. We also experienced growth in desktop search due to improvements in ad formats and delivery, as well as growth in YouTube driven primarily by video advertising.
Our Google properties revenues increased $9,734 million from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. The growth was primarily driven by increases in mobile search resulting from ongoing growth in user adoption and usage, as well as continued growth in advertiser activity. We also experienced growth in YouTube driven primarily by video advertising. The growth was partially offset by the general strengthening of the U.S. dollar compared to certain foreign currencies.
The number of paidPaid clicks through our advertising programs on Google properties increased from the three and nine months ended September 30, 20162021 to the three and nine months ended September 30, 20172022 driven by a number of interrelated factors, including an increase in search queries resulting from growth in user adoption and usage, primarily on mobile devices; growth in advertiser spending; and improvements we have made in ad formats and delivery. The increase in clicks for the three months ended September 30, 2022 was partially offset by a decrease in clicks relating to ads on Google Play.
Cost-per-click decreased from the three months ended September 30, 2021 to the three months ended September 30, 2022 and increased from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 due to a number of interrelated factors including changes in device mix, geographic mix, advertiser spending, ongoing product changes, and property mix, as well as the unfavorable effect of foreign currency exchange rates.
Impressions and cost-per-impression
The following table presents year-over-year changes in impressions and cost-per-impression (expressed as a percentage): | | | | | | | | | | | |
| | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2022 |
| Impressions change | 3% | | 5% |
| Cost-per-impression change | (5)% | | 4% |
Impressions increased from the three months ended September 30, 2021 to the three months ended September 30, 2022 primarily driven by growth in YouTube engagement ads, increasesGoogle Ad Manager and AdSense, partially offset by a decline in mobile search queries,impressions related to AdMob. The decrease in cost-per-impression from the three months ended September 30, 2021 to the three months ended September 30, 2022 was primarily driven by the unfavorable effect of foreign currency exchange rates.
Impressions increased from the nine months ended September 30, 2021 to the nine months ended September 30, 2022, driven by growth across Google Ad Manager, AdMob, and AdSense. The increase in cost-per-impression from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 was driven by a number of interrelated factors including ongoing product and policy changes, improvements we have made in ad formats and delivery, changes in device mix, geographic mix, product mix, and continued global expansionproperty mix, partially offset by the unfavorable effect of our products, advertisers and user base. The positive impact on ourforeign currency exchange rates.
Google other revenues
Google other revenues increased $141 million from an increasethe three months ended September 30, 2021 to the three months ended September 30, 2022 primarily driven by growth in paid clicks wasYouTube non-advertising followed by growth in hardware revenues, partially offset by a decrease in Google Play revenues. The growth in YouTube non-advertising was largely due to an increase in paid subscribers. The growth in hardware was primarily driven by an increase in phone sales. The decrease in Google Play revenues was primarily driven by a decrease in buyer spending. Additionally, the cost-per-clickoverall increase was partially offset by the unfavorable effect of foreign currency exchange rates.
Google other revenues increased $388 million from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 primarily driven by growth in YouTube non-advertising, partially offset by a decrease in Google Play revenues. The growth in YouTube non-advertising was largely due to an increase in paid subscribers. The decrease in Google Play revenues was primarily driven by our advertisersthe fee structure changes we
announced in 2021 as well as a decrease in buyer spending. Additionally, the overall increase was partially offset by the unfavorable effect of foreign currency exchange rates.
Google Cloud
Google Cloud revenues increased $1.9 billion and $5.3 billion from the three and nine months ended September 30, 20162021 to the three and nine months ended September 30, 2017. The decrease in cost-per-click was primarily driven by continued growth in YouTube engagement ads where cost-per-click remains lower than on our other advertising platforms. The decrease in cost-per-click was also impacted by changes in device mix, property mix, product mix, geographic mix, ongoing product changes, and fluctuations of the U.S. dollar compared to certain foreign currencies.
Google Network Members' properties
The following table presents our Google Network Members' properties revenues (in millions, unaudited) and changes in our paid clicks and cost-per-click (expressed as a percentage):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Google Network Members' properties revenues | $ | 3,732 |
| | $ | 4,342 |
| | $ | 11,167 |
| | $ | 12,597 |
|
| Google Network Members' properties revenues as a percentage of Google segment revenues | 16.8 | % | | 15.8 | % | | 17.5 | % | | 16.2 | % |
| Paid clicks change | | | 10 | % | | | | 9 | % |
| Cost-per-click change | | | (5 | )% | | | | (11 | )% |
Google Network Members' properties revenues consist primarily of advertising revenues generated from ads placed on Google Network Member properties through:
AdMob;
AdSense (such as AdSense for Search, AdSense for Content, etc.); and
DoubleClick AdExchange.
Our Google Network Members' properties revenues increased $610 million from the three months ended September 30, 2016 to the three months ended September 30, 2017.2022, respectively. The growth was primarily driven by strength in both programmatic advertising buyingGCP followed by Google Workspace offerings. Google Cloud's infrastructure and AdMob.
Our Google Network Members' properties revenues increased $1,430 million fromplatform services were the nine months ended September 30, 2016 to the nine months ended September 30, 2017. The growth was primarily driven by strength in both programmatic advertising buying and AdMob, offset by a decline in our traditional AdSense businesses and the general strengtheninglargest drivers of the U.S. dollar compared to certain foreign currencies.
The increase in paid clicks from the three and nine months ended September 30, 2016 to the three and nine months ended September 30, 2017 resulted primarily from growth in AdMob and an increase from our traditional AdSense for Search business. The positive impact on our revenues from an increase in paid clicks was partially offset by a decrease in the cost-per-click paid by our advertisers. The decrease in cost-per-click was impacted by changes in device mix, property mix, product mix, geographic mix, ongoing product changes, and fluctuations of the U.S. dollar compared to certain foreign currencies.GCP.
Google other revenues
The following table presents our Google other revenues (in millions, unaudited):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Google other revenues | $ | 2,433 |
| | $ | 3,405 |
| | $ | 6,677 |
| | $ | 9,590 |
|
| Google other revenues as a percentage of Google segment revenues | 10.9 | % | | 12.4 | % | | 10.5 | % | | 12.3 | % |
Google other revenues consist primarily of revenues from:
•Apps, in-app purchases, and digital content in the Google Play store;
Google Cloud offerings; and
Hardware.
Our Google other revenues increased $972 million from the three months ended September 30, 2016 to the three months ended September 30, 2017 and increased $2,913 million from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. The growth from the three and nine months ended September 30, 2016 to the three and nine months ended September 30, 2017 was primarily driven by revenues from Google Cloud offerings, revenues from Google Play, largely relating to in-app purchases (revenues which we recognize net of payout to developers), and hardware sales.
Other Bets
The following table presents our Other Bets revenues (in millions, unaudited):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Other Bets revenues | $ | 197 |
| | $ | 302 |
| | $ | 547 |
| | $ | 794 |
|
| Other Bets revenues as a percentage of total revenues | 0.9 | % | | 1.1 | % | | 0.9 | % | | 1.0 | % |
Other Bets revenues consist primarily of revenues and sales from:
Internet and TV services;
Licensing and R&D services; and
Nest branded hardware.
Our Other Bets revenues increased $105 million from the three months ended September 30, 2016 to the three months ended September 30, 2017 and increased $247 million from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. The growth from the three and nine months ended September 30, 2016 to the three and nine months ended September 30, 2017 was primarily driven by revenues from sales of Nest branded hardware, Fiber internet and TV services, and Verily licensing and R&D services.
Revenues by Geography
The following table presents our revenues by geography as a percentage of revenues, determined based on the billing addresses of our customers (unaudited):
|
| | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| United States | 47 | % | | 47 | % | | 47 | % | | 47 | % |
| EMEA | 33 | % | | 33 | % | | 34 | % | | 33 | % |
| APAC | 15 | % | | 15 | % | | 14 | % | | 15 | % |
| Other Americas | 5 | % | | 5 | % | | 5 | % | | 5 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2021 | | 2022 | | 2021 | | 2022 |
| United States | 46 | % | | 48 | % | | 46 | % | | 47 | % |
| EMEA | 30 | % | | 28 | % | | 31 | % | | 29 | % |
| APAC | 18 | % | | 17 | % | | 18 | % | | 17 | % |
| Other Americas | 6 | % | | 6 | % | | 5 | % | | 6 | % |
| Hedging gains (losses) | 0 | % | | 1 | % | | 0 | % | | 1 | % |
For the amounts offurther details on revenues by geography, see Note 2 of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Use of Constant Currency Revenues and Constant Currency Revenue GrowthPercentage Change
The impacteffect of currency exchange rates on our business is an important factor in understanding period to period comparisons. Our international revenues are favorably impacted as the U.S. dollar weakens relative to other foreign currencies, and unfavorably impacted as the U.S dollar strengthens relative to other foreign currencies. We use non-GAAP constant currency revenues and non-GAAP percentage change in constant currency revenue growthrevenues for financial and operational decision-making and as a means to evaluate period-to-period comparisons. We believe the presentation of results on a constant currency basis in addition to GAAP results helps improve the ability to understand our performance because they excludeit excludes the effects of foreign currency volatility that are not indicative of our core operating results.
Constant currency information compares results between periods as if exchange rates had remained constant period over period. We define constant currency revenues as total revenues excluding the impacteffect of foreign exchange rate movements and hedging activities, and use it to determine the constant currency revenue growthpercentage change on a year-on-year basis. Constant currency revenues are calculated by translating current period revenues using prior year comparable period exchange rates, as well as excluding any hedging impactseffects realized in the current period.
Constant currency revenue growth (expressed as a percentage)percentage change is calculated by determining the increasechange in current period revenues over prior year comparable period revenues where current period foreign currency revenues are translated using prior year comparable period exchange rates and hedging benefitseffects are excluded from revenues of both periods.
These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with GAAP.
The following table presents the foreign exchange impacteffect on our international revenues and total revenues (in millions, unaudited)except percentages): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | |
| | September 30, | | | | September 30, | | |
| 2021 | | 2022 | | % Change from Prior Year | | 2021 | | 2022 | | % Change from Prior Year |
| EMEA revenues | $ | 19,839 | | | $ | 19,450 | | | (2) | % | | $ | 55,954 | | | $ | 60,300 | | | 8 | % |
| EMEA constant currency revenues | | | 22,093 | | | 11 | % | | | | $ | 66,210 | | | 18 | % |
| | | | | | | | | | | |
| APAC revenues | 11,705 | | | 11,494 | | | (2) | % | | $ | 33,391 | | | $ | 35,045 | | | 5 | % |
| APAC constant currency revenues | | | 12,604 | | | 8 | % | | | | $ | 37,510 | | | 12 | % |
| | | | | | | | | | | |
| Other Americas revenues | 3,688 | | | 4,138 | | | 12 | % | | $ | 9,957 | | | $ | 12,320 | | | 24 | % |
| Other Americas constant currency revenues | | | 4,303 | | | 17 | % | | | | $ | 12,536 | | | 26 | % |
| | | | | | | | | | | |
| United States revenues | 29,824 | | | 33,372 | | | 12 | % | | $ | 83,064 | | | $ | 97,832 | | | 18 | % |
| | | | | | | | | | | |
| Hedging gains (losses) | 62 | | | 638 | | | | | $ | (54) | | | $ | 1,291 | | | |
| Total revenues | $ | 65,118 | | | $ | 69,092 | | | 6 | % | | $ | 182,312 | | | $ | 206,788 | | | 13 | % |
| Revenues, excluding hedging effect | $ | 65,056 | | | $ | 68,454 | | | | | $ | 182,366 | | | $ | 205,497 | | | |
| Exchange rate effect | | | 3,918 | | | | | | | 8,591 | | | |
| Total constant currency revenues | | | $ | 72,372 | | | 11 | % | | | | $ | 214,088 | | | 17 | % |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| EMEA revenues | $ | 7,392 |
| | $ | 9,097 |
| | $ | 22,007 |
| | $ | 25,733 |
|
| Exclude foreign exchange impact on current period revenues using prior year rates | 361 |
| | (283 | ) | | 867 |
| | 557 |
|
| Exclude hedging impact recognized in current period | (104 | ) | | 161 |
| | (293 | ) | | 15 |
|
| EMEA constant currency revenues | $ | 7,649 |
| | $ | 8,975 |
| | $ | 22,581 |
| | $ | 26,305 |
|
| Prior period EMEA revenues, excluding hedging impact | $ | 6,286 |
| | $ | 7,288 |
| | $ | 18,405 |
| | $ | 21,714 |
|
| EMEA revenue growth | 14 | % | | 23 | % | | 15 | % | | 17 | % |
| EMEA constant currency revenue growth | 22 | % | | 23 | % | | 23 | % | | 21 | % |
| | | | | | | | |
| APAC revenues | $ | 3,248 |
| | $ | 4,199 |
| | $ | 8,951 |
| | $ | 11,548 |
|
| Exclude foreign exchange impact on current period revenues using prior year rates | (210 | ) | | 54 |
| | (142 | ) | | (33 | ) |
| Exclude hedging impact recognized in current period | 0 |
| | 18 |
| | (31 | ) | | (52 | ) |
| APAC constant currency revenues | $ | 3,038 |
| | $ | 4,271 |
| | $ | 8,778 |
| | $ | 11,463 |
|
| Prior period APAC revenues, excluding hedging impact | $ | 2,406 |
| | $ | 3,248 |
| | $ | 6,893 |
| | $ | 8,920 |
|
| APAC revenue growth | 30 | % | | 29 | % | | 25 | % | | 29 | % |
| APAC constant currency revenue growth | 26 | % | | 31 | % | | 27 | % | | 29 | % |
| | | | | | | | |
| Other Americas revenues | $ | 1,162 |
| | $ | 1,546 |
| | $ | 3,185 |
| | $ | 4,230 |
|
| Exclude foreign exchange impact on current period revenues using prior year rates | 45 |
| | (26 | ) | | 346 |
| | (111 | ) |
| Exclude hedging impact recognized in current period | (1 | ) | | 12 |
| | (28 | ) | | 8 |
|
| Other Americas constant currency revenues | $ | 1,206 |
| | $ | 1,532 |
| | $ | 3,503 |
| | $ | 4,127 |
|
| Prior period Other Americas revenues, excluding hedging impact | $ | 949 |
| | $ | 1,161 |
| | $ | 2,777 |
| | $ | 3,157 |
|
| Other Americas revenue growth | 20 | % | | 33 | % | | 12 | % | | 33 | % |
| Other Americas constant currency revenue growth | 27 | % | | 32 | % | | 26 | % | | 31 | % |
| | | | | | | | |
| United States revenues | $ | 10,649 |
| | $ | 12,930 |
| | $ | 30,065 |
| | $ | 37,021 |
|
| United States revenue growth | 22 | % | | 21 | % | | 23 | % | | 23 | % |
| | | | | | | | |
| Total revenues | $ | 22,451 |
| | $ | 27,772 |
| | $ | 64,208 |
| | $ | 78,532 |
|
| Total constant currency revenues | $ | 22,542 |
| | $ | 27,708 |
| | $ | 64,927 |
| | $ | 78,916 |
|
| Total revenue growth | 20 | % | | 24 | % | | 20 | % | | 22 | % |
| Total constant currency revenue growth | 23 | % | | 24 | % | | 23 | % | | 24 | % |
ForEMEA revenue growth from the three and nine months ended September 30, 2017, our revenues from EMEA were favorably impacted2021 to the three and nine months ended September 30, 2022 was unfavorably affected by changes in foreign currency exchange rates, primarily becausedue to the U.S. dollar weakenedstrengthening relative to the Euro. ForEuro and British pound.
APAC revenue growth from the three and nine months ended September 30, 2017, our revenues from EMEA were2021 to the three and nine months ended September 30, 2022 was unfavorably impactedaffected by changes in foreign currency exchange rates, primarily because the U.S. dollar strengthened relativedue to the British pound.
For the three months ended September 30, 2017, our revenues from APAC were unfavorably impacted by changes in foreign currency exchange rates, primarily because the U.S. dollar strengthened relative to the Japanese yen, partially offset by the impact of the U.S. dollar weakening relative to the Australian dollar and Indian rupee. For the nine months ended September 30, 2017, our revenues from APAC were favorably impacted by changes in foreign
currency exchange rates, primarily because the U.S. dollar weakened relative to the Australian dollar, South Korean won and Taiwanese dollar, partially offset by the impact of the U.S. dollar strengthening relative to the Japanese yen.
ForOther Americas revenue growth from the three and nine months ended September 30, 2021 to the three and nine months ended September 30, 2022 was unfavorably affected by the general strengthening of the U.S. dollar.
Costs and Expenses
Cost of Revenues
The following table presents cost of revenues, including TAC (in millions, except percentages): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2021 | | 2022 | | 2021 | | 2022 |
| TAC | $ | 11,498 | | | $ | 11,826 | | | $ | 32,139 | | | $ | 36,030 | |
| Other cost of revenues | 16,123 | | | 19,332 | | | 45,812 | | | 54,831 | |
| Total cost of revenues | $ | 27,621 | | | $ | 31,158 | | | $ | 77,951 | | | $ | 90,861 | |
| Total cost of revenues as a percentage of revenues | 42.4 | % | | 45.1 | % | | 42.8 | % | | 43.9 | % |
Cost of revenues increased $3.5 billion from the three months ended September 30, 2017, our revenues from Other Americas were favorably impacted by changes in foreign currency exchange rates, primarily because the U.S. dollar weakened relative2021 to the Canadian dollar, Brazilian real,three months ended September 30, 2022 due to an increase in other cost of revenues and Mexican peso partially offset by the impactTAC of the U.S. dollar strengthening relative to the Argentine peso. For$3.2 billion and $328 million, respectively. Cost of revenues increased $12.9 billion from the nine months ended September 30, 2017, our revenues from Other Americas were favorably impacted by changes in foreign currency exchange rates, primarily because the U.S. dollar weakened relative2021 to the Brazilian real.
Costs and Expenses
Cost of Revenues
Cost of revenues consists of traffic acquisition costs (TAC) which are paidnine months ended September 30, 2022 due to Google Network Members primarily for ads displayed on their properties and amounts paid to our distribution partners who make available our search access points and services. Our distribution partners include browser providers, mobile carriers, original equipment manufacturers, and software developers.
Additionally,increases in other cost of revenues (which isand TAC of $9.0 billion and $3.9 billion, respectively.
The increase in TAC from the three months ended September 30, 2021 to the three months ended September 30, 2022 was primarily due to increases in TAC paid to distribution partners primarily driven by growth in revenues
subject to TAC. The increase in TAC from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 was due to increases in TAC paid to distribution partners and to Google Network partners, primarily driven by growth in revenues subject to TAC.
The TAC rate increased from 21.6% to 21.7% from the three months ended September 30, 2021 to the three months ended September 30, 2022 and increased from 21.7% to 21.8% from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 due to a combination of factors, none of which were individually significant. The TAC rate on Google Search & other revenues and the TAC rate on Google Network revenues were both substantially consistent from three and nine months ended September 30, 2021 to the three and nine months ended September 30, 2022.
The increase in other cost of revenues excluding traffic acquisition costs) includesfrom the following:
The expenses associated withthree months ended September 30, 2021 to the operation of ourthree months ended September 30, 2022 was primarily due to increases in data centers (including depreciation, labor including SBC, energy, bandwidth,center and other equipment costs);
Content acquisitionoperations costs as well as hardware costs. The increase in other cost of revenues from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 was primarily relateddue to payments to certain content providers from whom we license their videothe increases in data center and other operations costs followed by hardware costs and content for distribution on YouTubeacquisition costs.
Research and Google Play (we payDevelopment
The following table presents R&D expenses (in millions, except percentages): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2021 | | 2022 | | 2021 | | 2022 |
| Research and development expenses | $ | 7,694 | | | $ | 10,273 | | | $ | 22,854 | | | $ | 29,233 | |
| Research and development expenses as a percentage of revenues | 11.8 | % | | 14.9 | % | | 12.5 | % | | 14.1 | % |
R&D expenses increased $2.6 billion from the three months ended September 30, 2021 to the three months ended September 30, 2022. The increase was primarily driven by an increase in compensation expenses of $1.8 billion, largely resulting from a 24% increase in headcount.
R&D expenses increased $6.4 billion from the nine months ended September 30, 2021 to the nine months ended September 30, 2022. The increase was primarily driven by an increase in compensation expenses of $4.2 billion, largely resulting from an 19% increase in headcount, and an increase in professional services fees to these content providers based on revenues generated or a flat fee);of $619 million.
Credit card
Sales and other transaction fees related to processing customer transactions;
Inventory related costs for hardware we sell; and
Amortization of certain intangible assets.Marketing
The following tables present our costs of revenues, including traffic acquisition coststable presents sales and marketing expenses (in millions, unaudited)except percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2021 | | 2022 | | 2021 | | 2022 |
| Sales and marketing expenses | $ | 5,516 | | | $ | 6,929 | | | $ | 15,308 | | | $ | 19,384 | |
| Sales and marketing expenses as a percentage of revenues | 8.5 | % | | 10.0 | % | | 8.4 | % | | 9.4 | % |
Sales and marketing expenses increased $1.4 billion from the three months ended September 30, 2021 to the three months ended September 30, 2022. The increase was primarily driven by an increase in advertising and promotional activities of $708 million and an increase in compensation expenses of $515 million, largely resulting from a 19% increase in headcount.
Sales and marketing expenses increased $4.1 billion from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 primarily driven by an increase in advertising and promotional activities of $1.8 billion and an increase in compensation expenses of $1.7 billion, largely resulting from a 20% increase in headcount.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Traffic acquisition costs | $ | 4,182 |
| | $ | 5,502 |
| | $ | 11,945 |
| | $ | 15,222 |
|
| Other cost of revenues | 4,517 |
| | 5,646 |
| | 12,532 |
| | 16,094 |
|
| Total cost of revenues | $ | 8,699 |
| | $ | 11,148 |
| | $ | 24,477 |
| | $ | 31,316 |
|
| Total cost of revenues as a percentage of revenues | 38.7 | % | | 40.1 | % | | 38.1 | % | | 39.9 | % |
| | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Traffic acquisition costs to distribution partners | $ | 1,559 |
| | $ | 2,401 |
| | $ | 4,128 |
| | $ | 6,255 |
|
| Traffic acquisition costs to distribution partners as a percentage of Google properties revenues (Google properties TAC rate) | 9.7 | % | | 12.2 | % | | 9.0 | % | | 11.3 | % |
| | | | | | | | |
| Traffic acquisition costs to Google Network Members | $ | 2,623 |
| | $ | 3,101 |
| | $ | 7,817 |
| | $ | 8,967 |
|
| Traffic acquisition costs to Google Network Members as a percentage of Google Network Members' properties revenues (Network Members TAC rate) | 70.3 | % | | 71.4 | % | | 70.0 | % | | 71.2 | % |
| | | | | | | | |
| Traffic acquisition costs | $ | 4,182 |
| | $ | 5,502 |
| | $ | 11,945 |
| | $ | 15,222 |
|
| Traffic acquisition costs as a percentage of advertising revenues (Aggregate TAC rate) | 21.1 | % | | 22.9 | % | | 21.0 | % | | 22.3 | % |
General and Administrative
The cost of revenues that we incur related to revenues generated from ads placed on the properties of our Google Network Members are significantly higher than the costs of revenues that we incur related to revenues generated from ads placed on Google properties because most of the advertiser revenues from ads served on Google Network Members’ properties are paid as TAC to our Google Network Members.following table presents general and administrative expenses (in millions, except percentages): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2021 | | 2022 | | 2021 | | 2022 |
| General and administrative expenses | $ | 3,256 | | | $ | 3,597 | | | $ | 9,370 | | | $ | 10,628 | |
| General and administrative expenses as a percentage of revenues | 5.0 | % | | 5.2 | % | | 5.1 | % | | 5.1 | % |
Cost of revenuesGeneral and administrative expenses increased $2,449$341 million from the three months ended September 30, 20162021 to the three months ended September 30, 20172022. The increase was primarily driven by an increase in compensation expenses of $385 million, largely resulting from a 23% increase in headcount, and an increase in professional services fees of $214 million. The overall increase was partially offset by a decrease in charges related to legal matters of $228 million, including the $217 million reduction of the EC fine imposed in 2018. For further details on the EC fine imposed in 2018, see Note 9 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
General and administrative expenses increased $6,839$1.3 billion from the nine months ended September 30, 2021 to the nine months ended September 30, 2022. The increase was primarily driven by an increase in compensation expenses of $985 million, largely resulting from a 21% increase in headcount, and an increase in professional services fees of $811 million. The overall increase was partially offset by a decrease in charges related to legal matters of $1.0 billion.
Segment Profitability
The following table presents segment operating income (loss) (in millions). | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | |
| | | | | | | |
| Operating income (loss): | | | | | | | |
| Google Services | $ | 23,973 | | | $ | 19,781 | | | $ | 65,862 | | | $ | 65,471 | |
| Google Cloud | (644) | | | (699) | | | (2,209) | | | (2,488) | |
| Other Bets | (1,288) | | | (1,611) | | | (3,831) | | | (4,452) | |
Corporate costs, unallocated(1) | (1,010) | | | (336) | | | (2,993) | | | (1,849) | |
| Total income from operations | $ | 21,031 | | | $ | 17,135 | | | $ | 56,829 | | | $ | 56,682 | |
(1)Unallocated corporate costs primarily include corporate initiatives, corporate shared costs, such as finance and legal, including certain fines and settlements, as well as costs associated with certain shared R&D activities. Additionally, hedging gains (losses) related to revenue are included in corporate costs.
Google Services
Google Services operating income decreased $4.2 billion from the three months ended September 30, 2021 to the three months ended September 30, 2022. The decrease in operating income was primarily driven by increases in compensation expenses, hardware costs, and advertising and promotional activities, partially offset by growth in revenues.
Google Services operating income decreased $391 million from the nine months ended September 30, 20162021 to the nine months ended September 30, 2017 due2022. The decrease in operating income was primarily driven by increases in compensation expenses and TAC, partially offset by growth in revenues.
Google Cloud
Google Cloud operating loss increased $55 million and $279 million from the three and nine months ended September 30, 2021 to various factors, including (1) traffic acquisition costs, (2) data center costs which include depreciation, labor (including SBC), energy, bandwidth,the three and other equipment costs, (3) content acquisition costs as a result of increased activities related to YouTube, and (4) hardware related costs.
nine months ended September 30, 2022, respectively. The increase in TAC to distribution partnersoperating loss was primarily driven by an increase in Google properties revenues. The increase in the associated Google properties TAC rate wasexpenses, primarily driven by changes in partner agreements and the ongoing shift to mobile, which carries higher TAC because more mobile searches are channeled through paid access points. The increases in TAC to Google Network Members and the associated Network Members TAC rate were driven by the continued underlying shift in advertising buying from our traditional network business to programmatic advertising buying which carries higher TAC and the impact from sales allowances. The increase in the aggregate TAC rate was alsocompensation expenses, partially offset by a favorable revenue mix shift from Google Network Member properties to Google properties.
We expect cost of revenues to increasegrowth in dollar amount and as a percentage of total revenues in future periods based on a number of factors, including the following:
The relative revenue growth rates of Google properties and our Google Network Members’ properties;
Traffic acquisition costs paid to our distribution partners, which are affected by changes in device mix between mobile, desktop and tablet, partner mix, partner agreement terms such as revenue share arrangements, and the percentage of queries channeled through paid access points;
Traffic acquisition costs paid to Google Network Members, which are affected by ongoing adoption of programmatic advertising buying and changes in partner agreement terms;
The growth rates of expenses associated with our data center operations, content acquisition costs, as well as our hardware inventory and related costs; and
Increased proportion of non-advertising revenues as part of our total revenues.
43
Research and Development
The following table presents our R&D expenses (in millions, unaudited):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Research and development expenses | $ | 3,596 |
| | $ | 4,205 |
| | $ | 10,326 |
| | $ | 12,319 |
|
| Research and development expenses as a percentage of revenues | 16.0 | % | | 15.1 | % | | 16.1 | % | | 15.7 | % |
R&D expenses consist primarily of:Other Bets
Labor and facilities-related costs, including SBC, for employees responsible for R&D of our existing and new products and services and
Depreciation and equipment-related expenses.
R&D expensesOther Bets operating loss increased $609$323 million from the three months ended September 30, 20162021 to the three months ended September 30, 2017.2022. The increase in operating loss was primarily due todriven by an increase in labor and facilities-related costs of $363 million, largely resulting from a 17% increase in headcount, partially offset by the shift in the timing of our annual equity refresh cycle. In addition, there was an increase in depreciation and equipment-related expenses of $206 million.compensation expenses.
R&D expensesOther Bets operating loss increased $1,993$621 million from the nine months ended September 30, 20162021 to the nine months ended September 30, 2017.2022. The increase in operating loss was primarily due to an increase in labor and facilities-related costs of $1,465 million, largely resulting from a 17% increase in headcount. In addition, there was an increase in depreciation and equipment-related expenses of $358 million and an increase in professional services expenses of $107 million largely due to additional expenses incurred for outsourced services.
We expect that R&D expenses will increase in dollar amount and may fluctuate as a percentage of revenues in future periods.
Sales and Marketing
The following table presents our sales and marketing expenses (in millions, unaudited):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Sales and marketing expenses | $ | 2,565 |
| | $ | 3,042 |
| | $ | 7,367 |
| | $ | 8,583 |
|
| Sales and marketing expenses as a percentage of revenues | 11.5 | % | | 11.0 | % | | 11.5 | % | | 10.9 | % |
Sales and marketing expenses consist primarily of:
Labor and facilities-related costs, including SBC, for employees engaged in sales and marketing, sales support, and certain customer service functions; and
Advertising and promotional expenditures related to our products and services.
Sales and marketing expenses increased $477 million from the three months ended September 30, 2016 to the three months ended September 30, 2017. The increase was primarily due to an increase in advertising and promotional expenses of $251 million, largely resulting fromdriven by increases in marketing and promotion-relatedcompensation expenses, for our hardware products and Cloud offerings. In addition, there was an increase in labor and facilities-related costs of $151 million, largely resulting from a 5% increase in headcount, partially offset by the shiftgrowth in the timing of our annual equity refresh cycle.revenues.
Sales and marketing expenses increased $1,216 million from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. The increase was primarily due to an increase in labor and facilities-related costs of $643 million, largely resulting from a 6% increase in headcount. In addition, there was an increase in advertising and promotional expenses of $480 million, largely resulting from increases in marketing and promotion-related expenses for our hardware products.
We expect that sales and marketing expenses will increase in dollar amount and may fluctuate as a percentage of revenues in future periods.
General and Administrative
The following table presents our general and administrative expenses (in millions, unaudited):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| General and administrative expenses | $ | 1,824 |
| | $ | 1,595 |
| | $ | 4,961 |
| | $ | 5,096 |
|
| General and administrative expenses as a percentage of revenues | 8.1 | % | | 5.7 | % | | 7.7 | % | | 6.5 | % |
General and administrative expenses consist primarily of:
Labor and facilities-related costs, including SBC, for employees in our facilities, finance, human resources, information technology, and legal organizations;
Depreciation and equipment-related expenses;
Professional services fees primarily related to outside legal, audit, information technology consulting, and outsourcing services; and
Amortization of certain intangible assets.
General and administrative expenses decreased $229 million from the three months ended September 30, 2016 to the three months ended September 30, 2017. The decrease was primarily due to a decrease in labor and facilities-related costs of $184 million, partly resulting from the shift in the timing of our annual equity refresh cycle, as well as decreases in miscellaneous general and administrative expenses and reduced allocations.
General and administrative expenses increased $135 million from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. The increase was primarily due to an increase in professional service fees of $160 million due to additional expenses incurred for consulting and outsourced services and lower legal related costs in the first quarter of 2016. In addition, there was an increase in labor and facilities-related costs of $59 million,
largely resulting from a 12% increase in headcount. These increases were partially offset by decreases in miscellaneous general and administrative expenses and reduced allocations.
We expect general and administrative expenses will increase in dollar amount and may fluctuate as a percentage of revenues in future periods.
European Commission Fine
On June 27, 2017, the EC announced its decision that certain actions taken by Google regarding its display and ranking of shopping search results and ads infringed European competition law. The EC decision imposed a €2.42 billion (approximately $2.74 billion as of June 27, 2017) fine, which was accrued in the second quarter of 2017.
Other Income (Expense), Net
The following table presents other income (expense), net (in millions, unaudited)millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2021 | | 2022 | | 2021 | | 2022 |
| Other income (expense), net | $ | 2,033 | | | $ | (902) | | | $ | 9,503 | | | $ | (2,501) | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Other income (expense), net | $ | 278 |
| | $ | 197 |
| | $ | 216 |
| | $ | 693 |
|
| Other income (expense), net, as a percentage of revenues | 1.2 | % | | 0.7 | % | | 0.3 | % | | 0.9 | % |
Other income (expense)(expense), net, decreased $81 million$2.9 billion from the three months ended September 30, 20162021 to the three months ended September 30, 2017. This decrease was2022 primarily drivendue to changes in gains and losses on equity and debt securities. In the three months ended September 30, 2022, $731 million of net losses were recognized on debt securities, and $492 million of net unrealized losses were recognized on non-marketable equity securities. These losses were partially offset by losses recorded related tointerest income recognized of $615 million. In the three months ended September 30, 2021, $2.2 billion of net unrealized gains were recognized on marketable and non-marketable investments. These losses wereequity securities, partially offset by reduced costs$492 million of our foreign currency hedging activities.accrued performance fees related to certain investments.
Other income (expense), net, increased $477 milliondecreased $12.0 billion from the nine months ended September 30, 20162021 to the nine months ended September 30, 2017. This increase was2022 primarily driven by reduced costs of our foreign currency hedging activitiesdue changes in gains and decreased losses on equity securities and performance fees. In the nine months ended September 30, 2022, $2.5 billion of net unrealized losses were recognized on marketable equity securities and $1.9 billion of net losses were recognized on debt securities. These losses were partially offset by interest income recognized of $1.5 billion and $879 million of net unrealized gains on non-marketable equity securities. In the nine months ended September 30, 2021, $9.2 billion of net unrealized gains were recognized on marketable and non-marketable equity securities, partially offset by $1.7 billion of accrued performance fees related to certain investments.
The costs of our foreign exchange hedging activities recognized in other income (expense), net, are primarily a functionSee Note 3 of the notional amountNotes to Consolidated Financial Statements included in Item 1 of the option and forward contracts and their related duration, the movement of foreign exchange rates relative to the contract prices, the volatility of foreign exchange rates, and forward points. The hedging costs expensed in other income (expense), net, decreased as a result of less option premiums paid after we began to use foreign currency forward contracts to hedge our forecasted revenues in the fourth quarter of 2016.this Quarterly Report on Form 10-Q for further information.
We expect that other income (expense), net, will fluctuate in dollar amount in future periods as it is largely driven by market dynamics.
Provision for Income Taxes
The following table presents our provision for income taxes (in millions, unaudited) andexcept effective tax rate:rate):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
| Income before provision for income taxes | $ | 23,064 | | | $ | 16,233 | | | $ | 66,332 | | | $ | 54,181 | |
| Provision for income taxes | $ | 4,128 | | | $ | 2,323 | | | $ | 10,941 | | | $ | 7,833 | |
| Effective tax rate | 17.9 | % | | 14.3 | % | | 16.5 | % | | 14.5 | % |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2016 | | 2017 | | 2016 | | 2017 |
| Provision for income taxes | $ | 984 |
| | $ | 1,247 |
| | $ | 3,148 |
| | $ | 3,493 |
|
| Effective tax rate | 16.3 | % | | 15.6 | % | | 18.2 | % | | 18.2 | % |
OurThe effective tax rate decreased by 3.6 percentage points from the three months ended September 30, 20162021 to the three months ended September 30, 2017 as2022.The decrease was primarily driven by a result of a proportionate decreasechange in unrecognized tax benefits offsetand the effects of capitalization and amortization of R&D expenses starting in 2022 as required by other miscellaneous items. Our provision for income taxes increased from the three months ended September 30, 2016 to the three months ended September 30, 2017 as a result ofTax Cuts and Jobs Act generating an increase in taxable income year over year.
Our effectivethe U.S. federal Foreign-Derived Intangible Income tax rate remained flat from the nine months ended September 30, 2016 to the nine months ended September 30, 2017. Our provision for income taxes increased from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 asdeduction. These decreases were partially offset by a result of an increasedecrease in taxable income year over year.
Our future effective tax rate could be adversely affected bypre-tax earnings, being lower than anticipatedincluding in countries that have lower statutory rates and higher than anticipateda decrease in the stock-based compensation-related tax benefit.
The effective tax rate decreased by 2.0 percentage points from the nine months ended September 30, 2021 to the nine months ended September 30, 2022. The decrease was primarily driven by the effects of capitalization and amortization of R&D expenses starting in 2022 as required by the 2017 Tax Cuts and Jobs Act generating an increase in the U.S. federal Foreign-Derived Intangible Income tax deduction and a change in unrecognized tax benefits. These decreases were partially offset by a decrease in pre-tax earnings, including in countries that have higherlower statutory rates the net gains and losses recognized by legal entities on certain hedges and related hedged intercompany and other transactions under our foreign exchange risk management program, changesa decrease in the valuation of our deferredstock-based compensation-related tax assets, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.
benefit.
Financial Condition
Cash, Cash Equivalents, and LiquidityMarketable Securities
As of September 30, 2017,2022, we had $100.1$116.3 billion in cash, cash equivalents, and short-term marketable securities. CashCash equivalents and marketable securities are comprised of time deposits, money market and other funds, highly liquid debt instruments of the U.S. government and its agencies, debt instruments issued by foreign governments, debt instruments issued by municipalities in the U.S.,bonds, corporate debt securities, agency mortgage-backed and asset-backed securities and asset-backed securities. From time to time, we may hold marketable equity securities obtained through acquisitions or strategic investments in private companies that subsequently go public.securities.
AsSources, Uses of September 30, 2017, $60.5 billion of the $100.1 billion of cash, cash equivalents,Cash and marketable securities were held by our foreign subsidiaries. If these funds were needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.Related Trends
Our principal sources of liquidity are our cash, cash equivalents, and marketable securities, as well as the cash flow that we generate from operations. The primary use of capital continues to be to invest for the long-term growth of the business. We regularly evaluate our operations. cash and capital structure, including the size, pace and form of capital return to stockholders.
The following table presents our cash flows (in millions):
| | | | | | | | | | | |
| | Nine Months Ended |
| September 30, |
| | 2021 | | 2022 |
| Net cash provided by operating activities | $ | 66,718 | | | $ | 67,881 | |
| Net cash used in investing activities | $ | (24,507) | | | $ | (14,071) | |
| Net cash used in financing activities | $ | (44,851) | | | $ | (52,128) | |
Cash Provided by Operating Activities
Our largest source of cash provided by operations are advertising revenues generated by Google Search & other properties, Google Network properties and YouTube ads. Additionally, we generate cash through sales of apps and in-app purchases, digital content products, and hardware; and licensing and service fees including fees received for Google Cloud offerings and subscription-based products.
Our primary uses of cash from our operating activities include payments to distribution and Google Network partners, for compensation and related costs, and for content acquisition costs. In addition, uses of cash from operating activities include hardware costs, income taxes, and other general corporate expenditures.
Net cash provided by operating activities increased from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 primarily due to increases in cash received from revenues, partially offset by increases in cash paid for cost of revenues and operating expenses, and an increase in tax payments driven by the effects of capitalization and amortization of R&D expenses beginning in 2022 as required by the 2017 Tax Cuts and Jobs Act, and other working capital.
Cash Used in Investing Activities
Cash provided by investing activities consists primarily of maturities and sales of investments in marketable and non-marketable securities. Cash used in investing activities consists primarily of purchases of marketable and non-marketable securities, purchases of property and equipment, and payments for acquisitions.
Net cash used in investing activities decreased from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 primarily due to a net decrease in cash used for purchases, sales and maturities of marketable securities, partially offset by an increase of purchases of property and equipment.
Cash Used in Financing Activities
Cash provided by financing activities consists primarily of proceeds from issuance of debt and proceeds from the sale of interest in consolidated entities. Cash used in financing activities consists primarily of repurchases of stock, net payments related to stock-based award activities, and repayments of debt.
Net cash used in financing activities increased from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 primarily due to an increase in repurchases of stock.
Liquidity and Material Cash Requirements
We expect existing cash, cash equivalents, short-term marketable securities, cash flows from operations and financing activities to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for at least the next 12 months and thereafter for the foreseeable future.
Capital Expenditures and Leases
We make investments in land and buildings for data centers and offices and information technology assets through purchases of property and equipment and lease arrangements to provide capacity for the growth of our services and products.
Capital Expenditures
Our capital investments in property and equipment consist primarily of the following major categories:
•technical infrastructure, which consists of investments in servers and network equipment for computing, storage and networking requirements for ongoing business activities, including machine learning (collectively referred to as information technology assets) and data center land and building construction; and
•office facilities, ground up development projects, and related building improvements.
Construction in progress consists primarily of technical infrastructure and office facilities which have not yet been placed in service for our intended use. The time frame from date of purchase to placement in service of these assets may extend from months to years. For example, our data center construction projects are generally multi-year projects with multiple phases, where we acquire qualified land and buildings, construct buildings, and secure and install information technology assets.
During the nine months ended September 30, 2021 and 2022, capital expenditures were $18.3 billion and $23.9 billion, respectively. Depreciation of our property and equipment commences when the deployment of such assets are completed and are ready for our intended use. Land is not depreciated. For the nine months ended September 30, 2021 and 2022, depreciation and impairment expenses on property and equipment were $8.3 billion and $11.2 billion, respectively.
Leases
For the nine months ended September 30, 2021 and 2022, we recognized total operating lease assets of $2.2 billion and $3.4 billion, respectively. As of September 30, 2022, the amount of total future lease payments under operating leases, which had a weighted average remaining lease term of 9 years, was $16.8 billion. As of September 30, 2022, we have entered into leases that have not yet commenced with future lease payments of $4.1 billion, excluding purchase options, that are not yet recorded on our Consolidated Balance Sheets. These leases will commence between 2022 and 2026 with non-cancelable lease terms of 1 to 25 years.
For the nine months ended September 30, 2021 and 2022, our operating lease expenses (including variable lease costs) were $2.5 billion and $2.7 billion, respectively. Finance lease costs were not material for the nine months ended September 30, 2021 and 2022.
Financing
We have a short-term debt financing program of up to $5.0$10.0 billion through the issuance of commercial paper. Net proceeds from this program are used for general corporate purposes. WeAs of September 30, 2022, we had no commercial paper outstanding asoutstanding.
As of September 30, 2017. We have a2022, we had $10.0 billion of revolving credit facilities, $4.0 billion revolving credit facility expiring in February 2021.April 2023 and $6.0 billion expiring in April 2026. The interest raterates for theall credit facility isfacilities are determined based on a formula using certain market rates. Asrates, as well as our progress toward the achievement of September 30, 2017, nocertain sustainability goals. No amounts were outstandinghave been borrowed under the credit facility. We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions, and other liquidity requirements through at least the next 12 months.facilities.
As of September 30, 2017,2022, we havehad senior unsecured notes outstanding due in 2021, 2024, and 2026 with a total carrying value of $3.9 billion and a total estimated fair value of $4.0$12.9 billion.
In October 2016, the board of directors of Alphabet authorized the company to repurchase up to $7,019,340,976.83 of its Class C capital stock. In the nine months ended September 30, 2017, we repurchased and subsequently retired 3.1 million shares of Alphabet Class C capital stock for an aggregate amount of $2.7 billion.
In January 2017, Temasek, a Singapore-based investment company, signed a binding commitment to purchase a non-controlling interest in Verily for an aggregate of $800 million in cash. We received the first tranche of $480 million in the first quarter of 2017 and the final tranche of $320 million in the third quarter of 2017.
In September 2017, we entered into an agreement with HTC Corporation (HTC) to acquire a team of engineers and a non-exclusive license for HTC intellectual property for approximately $1.1 billion in cash. The transaction is expected to close in early 2018.
At December 31, 2016, we had a $1.4 billion interest-free, three-year prepayable promissory note (Note Receivable) due October 2017. The See Note Receivable was fully repaid in May 2017.
For the nine months ended September 30, 2016 and 2017, our cash flows were as follows (in millions, unaudited):
|
| | | | | | | |
| | Nine Months Ended |
| | September 30, |
| | 2016 | | 2017 |
| Net cash provided by operating activities | $ | 26,623 |
| | $ | 26,823 |
|
| Net cash used in investing activities | $ | (26,463 | ) | | $ | (24,427 | ) |
| Net cash used in financing activities | $ | (7,440 | ) | | $ | (5,120 | ) |
Cash Provided by Operating Activities
Our largest source of cash provided by our operations are advertising revenues generated by Google properties and Google Network Members' properties. Additionally, we generate cash through sales of apps, in-app purchases and digital content, hardware products, licensing arrangements, and service fees received for Google Cloud offerings.
Our primary uses of cash from our operating activities include payments to our Google Network Members and distribution partners, and payments for content acquisition costs. In addition, uses of cash from operating activities include compensation and related costs, hardware costs, other general corporate expenditures, and income taxes.
Net cash provided by operating activities increased from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 primarily due to increases in cash received from advertising revenues and Google other revenues (net of payouts to app developers) offset by increases in cash paid for cost of revenues, operating expenses, and income taxes.
Cash Used in Investing Activities
Cash provided by or used in investing activities primarily consists of purchases of property and equipment, purchases, maturities, and sales of marketable and non-marketable securities, payments for acquisitions, and proceeds from the collection of notes receivable.
Net cash used in investing activities decreased from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 primarily due to increases in maturities and sales of marketable securities, decreases in cash collateral paid related to securities lending, and increases in cash proceeds received from the collection5 of the Lenovo note receivable. These items were offset by increasesNotes to Consolidated Financial Statements included in purchases of marketable securities and increases in purchases of property and equipment.
Cash Used in Financing Activities
Cash provided by or used in financing activities consists primarily of net proceeds or payments from issuance or repayments of debt, repurchases of capital stock, net proceeds or payments from stock-based award activities, and proceeds from the sale of subsidiary shares.
Net cash used in financing activities decreased from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 primarily driven by decreases in the repayment of debt, decreases in repurchases of capital stock, and increases in proceeds from the sale of subsidiary shares. These items were offset by decreases in proceeds received from the issuance of debt and increases in net payments related to stock-based award activities.
Contractual Obligations
We had long-term taxes payable of $4.4 billion as of September 30, 2017 primarily related to uncertain tax positions. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors.
Revenues
For the sale of third-party goods and services, we evaluate whether we are the principal, and report revenues on a gross basis, or an agent, and report revenues on a net basis. In this assessment, we consider if we obtain control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price.
See Note 1 of Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our debt.
Share Repurchase Program
In April 2022, the summaryBoard of significant accounting policies.Directors of Alphabet authorized the company to repurchase up to $70.0 billion of its Class A and Class C shares. As of September 30, 2022, $43.5 billion remains available for Class A and Class C share repurchases. In addition,accordance with the authorization of the Board of Directors of Alphabet, during the three and nine months ended September 30, 2022, we repurchased and subsequently retired 138 million and 369 million aggregate shares for $15.4 billion and $43.9 billion, respectively. Of the aggregate amount repurchased and subsequently retired during the three months ended September 30, 2022, 25 million shares were Class A stock for $2.7 billion and 113 million shares were Class C stock for $12.7 billion. Of the aggregate amount repurchased and
subsequently retired during the nine months ended September 30, 2022, 46 million shares were Class A stock for $5.2 billion and 323 million shares were Class C stock for $38.7 billion.
European Commission Fines
In 2017, 2018 and 2019, the EC announced decisions that certain actions taken by Google infringed European competition law and imposed fines of €2.4 billion ($2.7 billion as of June 27, 2017), €4.3 billion ($5.1 billion as of June 30, 2018), and €1.5 billion ($1.7 billion as of March 20, 2019), respectively. On September 14, 2022, the General Court rejected our appeal on three claims, accepted our appeal on one claim, and reduced the fine to €4.1 billion. We are preparing to appeal to the European Court of Justice. In the second quarter of 2018 we recognized a charge of $5.1 billion for the fine, which we reduced by $217 million in the third quarter of 2022.
While each EC decision is under appeal, we included the fines in accrued expenses and other current liabilities on our Consolidated Balance Sheets as we provided bank guarantees (in lieu of a cash payment) for the fines. For further details, see Note 9 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.
Taxes
As of September 30, 2022, we had short-term and long-term income taxes payable of $1.6 billion and $4.2 billion related to a one-time transition tax payable incurred as a result of the U.S. Tax Cuts and Jobs Act ("Tax Act").As permitted by the Tax Act, we will pay the transition tax in annual interest-free installments through 2025. We also have taxes payable of $4.4 billion primarily related to uncertain tax positions as of September 30, 2022.
Critical Accounting Estimates
See Part I,II, Item 7, "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no other material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year ended December 31, 2016.2021.
Available Information
Our website is located at www.abc.xyz, and our investor relations website is located at www.abc.xyz/investor. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and our Proxy Statements,and any amendments to these reports, are available through our investor relations website, free of charge, after we file them with the SEC. We also provide a link to the section of the SEC's website at www.sec.gov that has all of the reports that we file or furnish with the SEC. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You can get information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We webcast via our investor relations website our earnings calls and certain events we participate in or host with members of the investment community. Our investor relations website also provides notifications of news or
announcements regarding our financial performance and other items of interest to our investors, including SEC filings, investor events, press and earnings releases, and blogs. We also share Google news and product updates on Google’s Keyword blog at https://www.blog.google/, which may be of interest or material to our investors. Further, corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters, and code of conduct, is also available on our investor relations website under the heading "Other." The content of our websites are not incorporated by reference into this Quarterly Report on Form 10-Q or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposedITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk, refer to financial market risks, including changes in currency exchange ratesPart II, Item 7A, Quantitative and interest rates.
Foreign Currency ExchangeQualitative Disclosures About Market Risk,
We transact business globally in multiple currencies. Our international revenues, as well as costs and expenses denominated in foreign currencies, expose us to the risk of fluctuations in foreign currency exchange rates against the U.S. dollar. In general, we are a net receiver of foreign currencies and therefore benefit from a weakening of the U.S. dollar and are adversely affected by a strengthening of the U.S. dollar relative to the foreign currency. As of September 30, 2017, our most significant currency exposures are the British pound, Euro, and Japanese yen.
We use foreign currency forwards and option contracts, including collars (an option strategy comprised of a combination of purchased and written options) to protect our forecasted U.S. dollar-equivalent earnings from changes in foreign currency exchange rates. When the U.S. dollar strengthens, gains from foreign currency options and forwards reduce the foreign currency losses related to our earnings. When the U.S. dollar weakens, losses from foreign currency options and forwards offset the foreign currency gains related to our earnings. These hedging contracts reduce, but do not entirely eliminate, the impact of currency exchange rate movements. We designate these contracts as cash flow hedges for accounting purposes. We record the effective portion of these contracts as a component of accumulated other comprehensive income (AOCI) and subsequently reclassify them into revenues to offset the hedged exposures as they occur.For foreign currency collars, we include the change in time value in our assessment of hedge effectiveness.For forwards and all other option contracts, we exclude the change in the forward points and time value from our assessment of hedge effectiveness. We recognize changes of the excluded components in other income (expense), net.
We considered the historical trends in currency exchange rates and determined that it was reasonably possible that changes in exchange rates of 10% could be experienced in the near term. If the U.S. dollar weakened by 10% as of September 30, 2017, the amount recorded in AOCI related to our foreign exchange contracts before tax effect would have been approximately $1.1 billion lower as of September 30, 2017. The change in the value recorded in AOCI would be expected to offset a corresponding foreign currency change in the forecasted hedged revenues when recognized.
In addition, we use foreign exchange forward contracts to offset the foreign exchange riskAnnual Report on our assets and liabilities denominated in currencies other than the local currency of the subsidiary. These forward contracts reduce, but do not entirely eliminate the impact of currency exchange rate movements on our assets and liabilities. The foreign currency gains and losses on the assets and liabilities are recorded in other income (expense), net, which are offset by the gains and losses on the forward contracts.
We considered the historical trends in currency exchange rates and determined that it was reasonably possible that adverse changes in exchange rates of 10% for all currencies could be experienced in the near term. These reasonably possible adverse changes in exchange rates of 10% were applied to total monetary assets and liabilities denominated in currencies other than the local currencies at the balance sheet dates to compute the adverse impact these changes would have had on our income before income taxes in the near term. These changes would have resulted in an adverse impact on income before income taxes of approximately $65 million as of September 30, 2017. The adverse impact as of September 30, 2017 is after consideration of the offsetting effect of approximately $325 million from foreign exchange contracts in placeForm 10-K for the month of September 30, 2017.
Interest Rate Risk
Our investment strategy is to achieve a return that will allow us to preserve capital and maintain liquidity requirements. We invest primarily in debt securities including those of the U.S. government and its agencies, corporate debt securities, agency mortgage-backed securities, money market and other funds, municipal securities, time deposits, asset backed securities, and debt instruments issued by foreign governments. By policy, we limit the amount of credit exposure to any one issuer. Our investments in both fixed rate and floating rate interest earning securities carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall. As ofyear ended December 31, 2016 and September 30, 2017, unrealized losses on our marketable debt securities were primarily due to temporary interest rate fluctuations as a result of higher market interest rates compared to interest rates at the time of purchase. We account for both fixed and variable rate securities at fair value with changes on gains and losses recorded in AOCI until the securities are sold.2021.
We considered the historical volatility of short-term interest rates and determined that it was reasonably possible that an adverse change of 100 basis points could be experienced in the near term. A hypothetical 1.00% (100 basis
points) increase in interest rates would have resulted in a decrease in the fair value of our marketable securities of approximately $1.8 billion as of September 30, 2017.
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ITEM 4. | CONTROLS AND PROCEDURES |
ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2017,2022, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
We rely extensively on information systems to manage our business and summarize and report operating results. In 2019, we began a multi-year implementation of a new global enterprise resource planning (ERP) system, which replaced much of our existing core financial systems. The ERP system is designed to accurately maintain our financial records, enhance the flow of financial information, improve data management and provide timely information to our management team. We have now completed implementation of the most significant modules planned to date. There werehave been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 20172022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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PART II. | OTHER INFORMATIONAlphabet Inc. |
PART II. OTHER INFORMATION ITEM 1.LEGAL PROCEEDINGS
For a description of our material pending legal proceedings, see Note 119 “Contingencies - Legal Matters” of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.
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ITEM 1A. | RISK FACTORSITEM 1A.RISK FACTORS |
Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016,2021, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common and capital stock. There have been noBelow are material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2016.2021.
A variety of new and existing laws and/or interpretations could harm our business. We are subject to numerous U.S. and foreign laws and regulations covering a wide variety of subject matters. New laws and regulations, or new interpretations or applications of existing laws and regulations in a manner inconsistent with our practices, have made, and may continue to make, our products and services less useful, limit our ability to pursue certain business models or offer certain products and services in certain jurisdictions, require us to incur substantial costs, expose us to civil or criminal liability, or cause us to change our business practices. These laws and regulations are evolving and involve matters central to our business, including, among others:
•Laws and regulations around the world focused on large technology platforms, including the Digital Markets Act in the European Union and proposed antitrust legislation on self-preferencing and mergers and acquisitions in the U.S., which may limit certain business practices, and in some cases, create the risk of significant penalties.
•Privacy laws, such as the GDPR, CCPA, CPRA, Virginia CDPA, and ColoPA (as defined and discussed further below).
•Data protection laws passed by many states within the U.S. and by certain countries regarding notification to data subjects and/or regulators when there is a security breach of personal data.
•Consumer protection laws, including EU’s New Deal for Consumers, which could result in monetary penalties and create a range of new compliance obligations.
•New laws further restricting the collection, processing and/or sharing of advertising-related data. Copyright or similar laws around the world, including the EU Directive on Copyright in the Digital Single Market (EUCD) and EU member state transpositions. These and similar laws that have been adopted or proposed introduce new licensing regimes that could affect our ability to operate. The EUCD and similar laws could also increase the liability of some content-sharing services with respect to content uploaded by their users. Some of these laws, as well as follow-on administrative or judicial actions, have also created or may create a new property right in news publications that limits the ability of some online services to link to, interact with, or present such content. They may also require individual or collective compensation negotiations with news agencies and publishers for the use of such content, which may result in payment obligations that significantly exceed the value that such content provides to Google and its users, potentially harming our services, commercial operations, and business results.
•Data localization laws, which generally mandate that certain types of data collected in a particular country be stored and/or processed within that country.
•Various U.S. and international laws that govern the distribution of certain materials to children and regulate the ability of online services to collect information from minors, including the Children’s Online Privacy Protection Act of 1998 and the United Kingdom’s Age-Appropriate Design Code.
•Various laws with regard to content moderation and removal, and related disclosure obligations, such as Germany's Network Enforcement Act, the European Union's Digital Services Act, Florida's Senate Bill 7072 and Texas' House Bill 20, which may affect our businesses and operations and may subject us to significant litigation, damage claims, and fines if they are interpreted and applied in a manner inconsistent with our practices and policies, or if we remove or promote (or fail to remove or promote) content in ways inconsistent with those laws. Other countries, including Singapore, Australia, and the United Kingdom, have implemented or are considering similar legislation imposing penalties for failure to remove certain types of content.
•Various legislative, litigation, and regulatory activity regarding our Google Play billing policies and business model, which could result in monetary penalties, damages and/or prohibition.
•Various legislative and regulatory activity requiring disclosure of information about the operation of our services and algorithms, which may make it easier for websites to artificially promote low-quality, deceptive, or harmful content on services like Google Search and YouTube, potentially harming the quality of our services.
In addition, the applicability and scope of these and other laws, as interpreted by the courts, remain uncertain and could be interpreted in ways that harm our business. For example:
•We rely on statutory safe harbors, like those set forth in the Digital Millennium Copyright Act and Section 230 of the Communications Decency Act in the U.S. and the E-Commerce Directive in Europe, against liability for various linking, caching, ranking, recommending, and hosting activities. Any legislation or court rulings affecting these safe harbors may adversely affect us and may impose significant operational challenges. There are legislative proposals and pending litigation in both the U.S. (such as Gonzalez v. Google) and EU that could diminish or eliminate safe harbor protection for websites and online platforms.
•Court decisions such as the judgment of the Court of Justice of the European Union (CJEU) on May 13, 2014 on the ‘right to be forgotten,’ which allows individuals to demand that Google remove search results about them in certain instances, may limit the content we can show to our users and impose significant operational burdens.
The introduction of new businesses, products, services, and technologies, our activities in certain jurisdictions, or other actions we take have subjected us, and will likely continue to subject us, to additional laws and regulations. Our investment in a variety of new fields, such as healthcare and payment services, has expanded, and will continue to expand, the scope of regulations that apply to our business. The costs of compliance with these laws and regulations are high and are likely to increase in the future. Any failure on our part to comply with laws and regulations can result in negative publicity and diversion of management time and effort and may subject us to significant liabilities and other penalties.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table presents information with respect to Alphabet's repurchases of Class A and Class C stock during the quarter ended September 30, 2022. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Class A Shares Purchased (in thousands) (1) | | Total Number of Class C Shares Purchased (in thousands) (1) | | Average Price Paid per Class A Share (2) | | Average Price Paid per Class C Share (2) | | Total Number of Shares Purchased as Part of Publicly Announced Programs (in thousands) (1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
(in millions) |
| July 1 - 31 | | 8,479 | | | 37,461 | | | $ | 112.62 | | | $ | 113.29 | | | 45,940 | | | $ | 53,675 | |
| August 1 - 31 | | 8,477 | | | 39,176 | | | $ | 115.95 | | | $ | 117.10 | | | 47,653 | | | $ | 48,104 | |
| September 1 - 30 | | 7,583 | | | 36,588 | | | $ | 104.57 | | | $ | 104.66 | | | 44,171 | | | $ | 43,482 | |
| Total | | 24,539 | | | 113,225 | | | | | | | 137,764 | | | |
(1)Repurchases are executed from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated transactions, including through Rule 10b5-1 plans. The repurchase program does not have an expiration date. See Note 10 in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to share repurchases.
(2)Average price paid per share includes costs associated with the repurchases.
ITEM 5.OTHER INFORMATION
Under Section 13(r) of the Exchange Act, we are required to disclose if we or any of our affiliates knowingly conducted a transaction or dealing with entities or individuals designated pursuant to certain Executive Orders. The U.S. government has designated the Russian Federal Security Service (the “FSB”) pursuant to one of those Executive Orders, and the U.S. Department of the Treasury’s Office of Foreign Assets Control has accordingly updated General License No. 1B (the “OFAC General License”), which generally permits U.S. persons to engage in transactions and activities prohibited by the relevant Executive Order involving the FSB that are necessary and ordinarily incident to requesting, receiving, utilizing, paying for or dealing in licenses, permits, certifications, or notifications issued or registered by the FSB for the importation, distribution, or use of information technology products in Russia.
In the past year and during the quarter ended September 30, 2022, Google LLC, a subsidiary of Alphabet, filed notifications with the FSB as required pursuant to Russian encryption product import controls for the purpose of enabling the import of certain software in Russia. Neither we nor our subsidiaries generated any gross revenues or net profits directly from such approval activity and neither we nor our subsidiaries sell to the FSB. Alphabet expects that Google LLC will continue to file these notifications as required under Russia law.
ITEM 6.EXHIBITS
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ITEM 6.Exhibit
Number | EXHIBITS | Description | | Incorporated by reference herein |
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Exhibit
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31.01 | | | | | | |
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| 31.01 | * | | | | | |
| 31.02 | * | | | | | |
| 32.01 | ‡ | | | | | |
| 101.INS | * | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | |
| 101.SCH | * | Inline XBRL Taxonomy Extension Schema Document | | | | |
| 101.CAL | * | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | |
| 101.DEF | * | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | |
| 101.LAB | * | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | |
| 101.PRE | * | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | |
104
| | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | |
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* | Filed herewith. |
‡* | Filed herewith. |
| ‡ | Furnished herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | ALPHABET INC. |
| October 25, 2022 | By: | ALPHABET INC. |
October 26, 2017 | By: | /s/ RUTH M. PORAT |
| | Ruth M. Porat |
| | Senior Vice President and Chief Financial Officer |
| | | | | | | | |
| | ALPHABET INC. |
| October 25, 2022 | By: | ALPHABET INC./s/ AMIE THUENER O'TOOLE |
October 26, 2017 | By: | /s/ JAMES G. CAMPBELL Amie Thuener O'Toole |
| | James G. Campbell |
| | Vice President Corporate Controller, and Chief Accounting Officer |