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10-Q 1 goog10-qq12017.htm FORM 10-Q Document

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________________________________________________

FORM 10-Q

________________________________________________________________________________________

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017



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

For the transition period from _______ to _______

Commission file number: 001-37580

________________________________________________________________________________________

Alphabet Inc.

(Exact name of registrant as specified in its charter)

________________________________________________________________________________________



Delaware	61-1767919
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

1600 Amphitheatre Parkway

Mountain View, CA 94043

(Address of principal executive offices, including zip code)

(650) 253-0000

(Registrant’s telephone number, including area code)

________________________________________________________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting, 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.



Large accelerated filer	ý	Accelerated filer	¨
Non-accelerated filer (Do not check if a smaller reporting company)	¨	Smaller reporting company	¨
Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

As of April 27, 2017, there were 297,628,801 shares of Alphabet’s Class A common stock outstanding, 47,152,692 shares of Alphabet's Class B common stock outstanding, and 346,967,110 Alphabet's Class C capital stock outstanding.



Table of Contents	Alphabet Inc.

Alphabet Inc.

Form 10-Q

For the Quarterly Period Ended March 31, 2017

TABLE OF CONTENTS



		Page No.
Note About Forward-Looking Statements		1

PART I. FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited)	3
	Consolidated Balance Sheets - December 31, 2016 and March 31, 2017	3
	Consolidated Statements of Income - Three Months Ended March 31, 2016 and 2017	4
	Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2016 and 2017	5
	Consolidated Statements of Cash Flows - Three Months Ended March 31, 2016 and 2017	6
	Notes to Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4	Controls and Procedures	43

PART II. OTHER INFORMATION
Item 1	Legal Proceedings	44
Item 1A	Risk Factors	44
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 6	Exhibits	44
	Signature	45
	Exhibit Index	46



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NOTE 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 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;


•	our expectation that we will continue to take steps to improve the relevance of the ads we deliver and to reduce 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;


•	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 costs related to hedging activities under our foreign exchange risk management program;


•	our expectation that our cost of revenues, research and development expenses, sales and marketing expenses, and general and administrative expenses will increase in dollars and 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;


•	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 of our revenues that we derive from non-advertising revenues will continue to increase;


•	our expectation that our other income (loss), net, 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;


•	the sufficiency of our sources of funding;


•	our payment terms to certain advertisers, which may increase our working capital requirements;


•	fluctuations in our capital expenditures;


•	our expectations related to the operating structure implemented pursuant to the Alphabet holding company reorganization;


•	the expected timing and amount of Alphabet Inc.'s stock repurchases;

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" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as may be updated in our subsequent Quarterly Reports 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, 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.



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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.



Table of Contents	Alphabet Inc.


PART I.	FINANCIAL INFORMATION


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 March 31, 2017
				(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	12,918		$	18,132
Marketable securities	73,415			74,307
Total cash, cash equivalents, and marketable securities	86,333			92,439
Accounts receivable, net of allowance of $467 and $489	14,137			12,913
Income taxes receivable, net	95			56
Inventory	268			280
Prepaid revenue share, expenses and other assets	4,575			3,106
Total current assets	105,408			108,794
Prepaid revenue share, expenses and other assets, non-current	1,819			1,846
Non-marketable investments	5,878			6,131
Deferred income taxes	383			365
Property and equipment, net	34,234			35,936
Intangible assets, net	3,307			3,137
Goodwill	16,468			16,547
Total assets	$	167,497		$	172,756
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,041		$	2,306
Accrued compensation and benefits	3,976			2,673
Accrued expenses and other current liabilities	6,144			5,438
Accrued revenue share	2,942			2,888
Deferred revenue	1,099			1,148
Income taxes payable, net	554			803
Total current liabilities	16,756			15,256
Long-term debt	3,935			3,937
Deferred revenue, non-current	202			323
Income taxes payable, non-current	4,677			4,924
Deferred income taxes	226			604
Other long-term liabilities	2,665			2,763
Total liabilities	28,461			27,807
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 692,108 (Class A 297,600, Class B 47,164, Class C 347,344) shares issued and outstanding	36,307			37,698
Accumulated other comprehensive loss	(2,402		)	(2,169		)
Retained earnings	105,131			109,420
Total stockholders’ equity	139,036			144,949
Total liabilities and stockholders’ equity	$	167,497		$	172,756

See accompanying notes.



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Alphabet Inc.

CONSOLIDATED STATEMENTS OF INCOME

(in millions, except per share amounts; unaudited)



	Three Months Ended
	March 31,
	2016			2017
Revenues	$	20,257		$	24,750
Costs and expenses:
Cost of revenues	7,648			9,795
Research and development	3,367			3,942
Sales and marketing	2,387			2,644
General and administrative	1,513			1,801
Total costs and expenses	14,915			18,182
Income from operations	5,342			6,568
Other income (expense), net	(213		)	251
Income before income taxes	5,129			6,819
Provision for income taxes	922			1,393
Net income	$	4,207		$	5,426

Basic net income per share of Class A and B common stock and Class C capital stock	$	6.12		$	7.85
Diluted net income per share of Class A and B common stock and Class C capital stock	$	6.02		$	7.73

See accompanying notes.



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Alphabet Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions; unaudited)



	Three Months Ended
	March 31,
	2016			2017
Net income	$	4,207		$	5,426
Other comprehensive income:
Change in foreign currency translation adjustment	156			451
Available-for-sale investments:
Change in net unrealized gains (losses)	356			139
Less: reclassification adjustment for net (gains) losses included in net income	169			25
Net change (net of tax effect of $119 and $0)	525			164
Cash flow hedges:
Change in net unrealized gains (losses)	16			(229		)
Less: reclassification adjustment for net (gains) losses included in net income	(117		)	(153		)
Net change (net of tax effect of $37 and $149)	(101		)	(382		)
Other comprehensive income	580			233
Comprehensive income	$	4,787		$	5,659

See accompanying notes.



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Alphabet Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions; unaudited)



	Three Months Ended
	March 31,
	2016			2017
Operating activities
Net income	$	4,207		$	5,426
Adjustments:
Depreciation and impairment of property and equipment	1,155			1,287
Amortization and impairment of intangible assets	216			216
Stock-based compensation expense	1,494			2,009
Deferred income taxes	414			613
Loss on marketable and non-marketable investments, net	280			68
Other	64			8
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable	818			1,267
Income taxes, net	271			510
Prepaid revenue share, expenses and other assets	185			(128		)
Accounts payable	(269		)	103
Accrued expenses and other liabilities	(1,064		)	(1,868		)
Accrued revenue share	(131		)	(74		)
Deferred revenue	18			111
Net cash provided by operating activities	7,658			9,548
Investing activities
Purchases of property and equipment	(2,444		)	(2,508		)
Proceeds from disposals of property and equipment	16			41
Purchases of marketable securities	(20,748		)	(20,119		)
Maturities and sales of marketable securities	17,443			19,362
Purchases of non-marketable investments	(363		)	(354		)
Maturities and sales of non-marketable investments	42			78
Cash collateral related to securities lending	(257		)	0
Investments in reverse repurchase agreements	100			0
Acquisitions, net of cash acquired, and purchases of intangible assets	(34		)	(101		)
Proceeds from collection of notes receivable	0			750
Net cash used in investing activities	(6,245		)	(2,851		)
Financing activities
Net payments related to stock-based award activities	(807		)	(1,009		)
Repurchases of capital stock	(2,098		)	(1,127		)
Proceeds from issuance of debt, net of costs	3,956			0
Repayments of debt	(3,962		)	(18		)
Proceeds from sale of subsidiary shares	0			480
Net cash used in financing activities	(2,911		)	(1,674		)
Effect of exchange rate changes on cash and cash equivalents	60			191
Net increase (decrease) in cash and cash equivalents	(1,438		)	5,214
Cash and cash equivalents at beginning of period	16,549			12,918
Cash and cash equivalents at end of period	$	15,111		$	18,132

See accompanying notes.



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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 1998 and re-incorporated in Delaware in 2003. In 2015, we implemented a holding company reorganization, and as a result, Alphabet Inc. (Alphabet) became the successor issuer to Google. We generate revenues primarily by delivering relevant, cost-effective online advertising.

Basis of Consolidation

The consolidated financial statements of Alphabet include the accounts of Alphabet and all wholly-owned subsidiaries as well as all variable interest entities where we are the primary beneficiary. All intercompany balances and transactions have been eliminated.

Unaudited Interim Financial Information

The accompanying Consolidated Balance Sheet as of March 31, 2017, the Consolidated Statements of Income for the three months ended March 31, 2016 and 2017, the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2017, and the Consolidated Statements of Cash Flows for the three months ended March 31, 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 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 March 31, 2017, our results of operations for the three months ended March 31, 2016 and 2017, and our cash flows for the three months ended March 31, 2016 and 2017. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the 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 make 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 value.

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



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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 our consolidated financial statements relates to the recognition and measurement of equity investments at fair value in our consolidated statement of income. While we continue to evaluate the effect of the standard, 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 investments.

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 anticipate that the adoption of Topic 842 will materially affect our Consolidated Balance Sheets and will require changes to our systems and processes. We plan to adopt Topic 842 effective January 1, 2019 and are evaluating the use of the optional practical expedients.

In June 2016, 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 currently in the process of evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.

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,



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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"

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 for the quarter ended March 31, 2017 was an increase of $14 million as a result of applying Topic 606.

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 source (in millions, unaudited). Sales and usage-based taxes are excluded from revenues.



	Three Months Ended
	March 31,
	2016⁽¹⁾		2017
Google properties	$	14,328	$	17,403
Google Network Members' properties	3,692		4,008
Google advertising revenues	18,020		21,411
Google other revenues	2,072		3,095
Other Bets revenues	165		244
Total revenues⁽²⁾	$	20,257	$	24,750


⁽¹⁾	As noted above, prior period amounts have not been adjusted under the modified retrospective method.


⁽²⁾	Revenues include $169 million and $217 million related to hedging gains for the three months ended March 31, 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):



	Three Months Ended
	March 31,
	2016		2017
United States	$	9,381	$	11,769
EMEA⁽¹⁾	7,130		8,091
APAC⁽¹⁾	2,799		3,619
Other Americas⁽¹⁾	947		1,271
Total revenues⁽²⁾	$	20,257	$	24,750


⁽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 for the three months ended March 31, 2016 and 2017.



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Advertising Revenues

We generate revenues primarily 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 of our customers pay us on a cost-per-click basis (CPC), which means that an advertiser pays us only 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 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 and Google Network Members’ properties. For these customers, we recognize 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 are recorded as revenues, and amounts paid to publishers are recorded as cost of revenues. We are the principal because 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, being primarily responsible to our customers, having discretion in establishing pricing, or a combination of these.

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;


•	Hardware;


•	Google Cloud offerings; 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

Our 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 customers or using expected cost plus margin.

Deferred Revenues

We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The increase in the deferred revenue balance for the three months ended March 31, 2017 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $414 million of revenues recognized that were included in the deferred revenue balance at the beginning of the period.



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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

We classify our cash equivalents and marketable securities within Level 1 or Level 2 in the fair value hierarchy because we use quoted market prices 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 the fair value hierarchy as the valuation inputs are based on quoted prices and market observable data of similar instruments.

Cash, Cash Equivalents, and Marketable Securities

The following tables summarize our cash, cash equivalents, and marketable securities by significant investment categories as of December 31, 2016 and March 31, 2017 (in millions):



	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



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	As of March 31, 2017
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash and Cash Equivalents		Marketable Securities
	(unaudited)
Cash	$	7,217	$	0	$	0		$	7,217	$	7,217	$	0
Level 1:
Money market and other funds	4,454		0		0			4,454		4,454		0
U.S. government notes	46,931		34		(158		)	46,807		5,706		41,101
Marketable equity securities	201		116		0			317		0		317
	51,586		150		(158		)	51,578		10,160		41,418
Level 2:
Time deposits⁽¹⁾	54		0		0			54		52		2
Mutual funds⁽²⁾	233		8		0			241		0		241
U.S. government agencies	2,029		0		(5		)	2,024		649		1,375
Foreign government bonds	2,409		16		(5		)	2,420		0		2,420
Municipal securities	4,866		9		(11		)	4,864		24		4,840
Corporate debt securities	11,869		40		(33		)	11,876		30		11,846
Agency mortgage-backed securities	9,863		18		(203		)	9,678		0		9,678
Asset-backed securities	2,485		3		(1		)	2,487		0		2,487
	33,808		94		(258		)	33,644		755		32,889
Total	$	92,611	$	244	$	(416	)	$	92,439	$	18,132	$	74,307


⁽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 marketable securities on a specific identification method. We recognized gross realized gains of $68 million and $148 million for the three months ended March 31, 2016 and 2017, respectively. We recognized gross realized losses of $235 million and $170 million for the three months ended March 31, 2016 and 2017, respectively. We reflect these gains and losses as a component of other income (expense), net in the accompanying Consolidated Statements of Income.

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 the contractual maturity date of the securities (in millions, unaudited):



	As of March 31, 2017
Due in 1 year	$	20,773
Due in 1 year through 5 years	41,604
Due in 5 years through 10 years	989
Due after 10 years	10,383
Total	$	73,749



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Impairment Considerations for Marketable Investments

The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2016 and March 31, 2017, 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 March 31, 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	$	30,331	$	(158	)	$	0	$	0		$	30,331	$	(158	)
U.S. government agencies	1,274		(5		)	0		0			1,274		(5		)
Foreign government bonds	865		(5		)	0		0			865		(5		)
Municipal securities	1,970		(9		)	45		(2		)	2,015		(11		)
Corporate debt securities	5,563		(33		)	0		0			5,563		(33		)
Agency mortgage-backed securities	8,690		(193		)	251		(10		)	8,941		(203		)
Asset-backed securities	758		(1		)	0		0			758		(1		)
Total	$	49,451	$	(404	)	$	296	$	(12	)	$	49,747	$	(416	)

During the three months ended March 31, 2017, we did not recognize any other-than-temporary impairment losses. During the three months ended March 31, 2016, we recognized $87 million of other-than-temporary impairment losses related to our marketable equity securities. Those losses are included in 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 recognize derivative instruments as either assets or liabilities in the accompanying Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives in the accompanying Consolidated Statements of Income as other income (expense), net, revenues, or accumulated other comprehensive income (AOCI) in the accompanying Consolidated Balance Sheets, 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, we enter into collateral security arrangements under which the counterparty is required to provide collateral when the net fair value of certain financial instruments fluctuates from contractually established thresholds. We can take possession of the collateral in the event of counterparty default. As of December 31, 2016 and March 31, 2017, we received cash collateral related to the derivative instruments under our collateral security arrangements of $362 million and $69 million, respectively.



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Cash Flow Hedges

We use foreign currency forward and option contracts designated as cash flow hedges to hedge certain forecasted 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 $9.8 billion as of December 31, 2016 and March 31, 2017, respectively. These contracts have maturities of 24 months or less.

We reflect gain or loss on the effective portion of a cash flow hedge as a component of AOCI and subsequently reclassify cumulative gains and losses to revenues or interest expense when the hedged transactions are recorded. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI are immediately reclassified to other income (expense), net. Further, we exclude the change in the time value and forward points of foreign currency options and forward contracts from our assessment of hedge effectiveness. We recognize changes in the excluded components in other income (expense), net.

As of March 31, 2017, the effective portion of our cash flow hedges before tax effect was a net accumulated gain of $72 million, of which $37 million is expected to be reclassified from AOCI into earnings within the next 12 months.

Fair Value Hedges

We use 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 changes in forward points for the forward contracts from the assessment of hedge effectiveness. The notional principal of these contracts was $2.4 billion as of December 31, 2016 and March 31, 2017.

Gains and losses on these forward contracts are recognized in other income (expense), net, along with the offsetting losses and gains of the related hedged items.

Other Derivatives

Other derivatives not designated as hedging instruments consist of foreign currency forward contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the local currency of a subsidiary. We recognize gains and losses on these contracts, as well as the related costs in other income (expense), net, along with the foreign currency gains and losses on monetary assets and liabilities. The notional principal of these foreign exchange contracts outstanding was $7.9 billion and $9.0 billion as of December 31, 2016 and March 31, 2017, respectively.

We also use exchange-traded interest rate futures contracts and “To Be Announced” (TBA) forward purchase commitments of mortgage-backed assets to hedge interest rate risks on certain fixed income securities. The TBA contracts meet the definition of derivative instruments in cases where physical delivery of the assets is not taken at the earliest available delivery date. Our interest rate futures and TBA contracts (together interest rate contracts) are not designated as hedging instruments. We recognize gains and losses on these contracts, as well as the related costs, in other income (expense), net. The gains and losses are generally economically offset by unrealized gains and losses in the underlying available-for-sale securities, which are recorded as a component of AOCI until the securities are sold or other-than-temporarily impaired, at which time the amounts are moved from AOCI into other income (expense), net. No interest rate contracts were outstanding as of December 31, 2016 and March 31, 2017.



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The fair values of our outstanding derivative instruments were as follows (in millions):



		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	Prepaid revenue share, expenses and other assets, current and non-current	$	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 March 31, 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	Prepaid revenue share, expenses and other assets, current and non-current	$	135	$	25	$	160
Total		$	135	$	25	$	160
Derivative Liabilities:
Level 2:
Foreign exchange contracts	Accrued expenses and other liabilities, current and non-current	$	98	$	60	$	158
Total		$	98	$	60	$	158

The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income (OCI) is summarized below (in millions, unaudited):



	Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect (Effective Portion)
	Three Months Ended
	March 31,
Derivatives in Cash Flow Hedging Relationship	2016		2017
Foreign exchange contracts	$	33	$	(313	)



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	Gains (Losses) Reclassified from AOCI into Income (Effective Portion)
		Three Months Ended
		March 31,
Derivatives in Cash Flow Hedging Relationship	Location	2016		2017
Foreign exchange contracts	Revenues	$	169	$	217
Interest rate contracts	Other income (expense), net	1		1
Total		$	170	$	218



	Gains (Losses) Recognized in Income on Derivatives (Amount Excluded from Effectiveness Testing and Ineffective Portion) ⁽¹⁾
		Three Months Ended
		March 31,
Derivatives in Cash Flow Hedging Relationship	Location	2016			2017
Foreign exchange contracts	Other income (expense), net	$	(139	)	$	26


⁽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
		March 31,
Derivatives in Fair Value Hedging Relationship	Location	2016			2017
Foreign Exchange Hedges:
Foreign exchange contracts	Other income (expense), net	$	(28	)	$	(47	)
Hedged item	Other income (expense), net	28			51
Total		$	0		$	4


⁽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):



	Gains (Losses) Recognized in Income on Derivatives
		Three Months Ended
		March 31,
Derivatives Not Designated As Hedging Instruments	Location	2016			2017
Foreign exchange contracts	Other income (expense), net	$	(74	)	$	(202	)
Interest rate contracts	Other income (expense), net	(8		)	1
Total		$	(82	)	$	(201	)



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Offsetting of Derivatives

We present our derivatives at gross fair values in the Consolidated Balance Sheets. However, our master netting and other similar arrangements allow net settlements under certain conditions. As of December 31, 2016 and March 31, 2017, information related to these offsetting arrangements were as follows (in millions):



Offsetting of Assets
	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 March 31, 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	$	160	$	0	$	160	$	(43	)	⁽¹⁾	$	(45	)	$	(6	)	$	66


⁽¹⁾	The balances as of December 31, 2016 and March 31, 2017 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, 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 March 31, 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	$	158	$	0	$	158	$	(43	)	⁽²⁾	$	0	$	0	$	115


⁽²⁾	The balances as of December 31, 2016 and March 31, 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 Investments

Our non-marketable investments include non-marketable equity investments and non-marketable debt securities.

Non-Marketable Equity Investments

Our non-marketable equity investments are investments we have made in privately-held companies accounted for under the equity or cost method and are not required to be consolidated under the variable interest or voting models. As of December 31, 2016 and March 31, 2017, investments accounted for under the equity method had a carrying value of approximately $1.7 billion and $1.7 billion, respectively. Our share of equity method investee earnings and losses including impairment was a net loss of $105 million and $49 million for the three months ended March 31, 2016



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and March 31, 2017, respectively. As of December 31, 2016 and March 31, 2017, investments accounted for under the cost method had a carrying value of $3.0 billion and $3.1 billion, respectively, and a fair value of approximately $8.1 billion and $8.2 billion, respectively. The fair value of 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 component of other income (expense), net, in the accompanying Consolidated Statements of Income.

Certain renewable energy investments included in our non-marketable equity investments accounted for under the equity method are variable interest entities (VIE). These entities' 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 VIE's economic performance such as setting operating budgets. Therefore, we do not consolidate these VIEs in our financial statements. The carrying value and maximum exposure of these VIEs were $1.2 billion as of December 31, 2016 and March 31, 2017. The maximum exposure is based on current investments to date. We have determined the single source of our exposure to these VIEs is our capital investment in these entities. We periodically reassess whether we are the primary beneficiary of a VIE. 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, 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 cost of these securities were $1.1 billion as of December 31, 2016 and March 31, 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 will estimate the value based on the best available information at the measurement date. No significant impairments were recognized for the three months ended March 31, 2016 and 2017.

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):



	Three Months Ended
	March 31,
	2016			2017
Beginning balance	$	1,024		$	1,165
Total net gains (losses)
Included in other comprehensive income	90			65
Purchases	24			64
Sales	(6		)	(1		)
Settlements	0			(3		)
Ending balance	$	1,132		$	1,290

Note 5. Debt

Short-Term Debt

We have a debt financing program of up to $5.0 billion through the issuance of commercial paper. Net proceeds from this program are used for general corporate purposes. We had no commercial paper outstanding as of December 31, 2016 and March 31, 2017. In conjunction with this program, we have a $4.0 billion revolving credit facility which expires in February 2021. The interest rate for the credit facility is determined based on a formula using certain market rates. No amounts were outstanding under the credit facility as of December 31, 2016 and March 31, 2017.



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Long-Term Debt

Google issued $3.0 billion of senior unsecured notes in three tranches (collectively, the 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 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 of outstanding commercial paper. The Alphabet notes due in 2021, 2024, and 2026 rank equally with each other and are structurally subordinated to the outstanding Google Notes.

The total outstanding long-term debt is summarized below (in millions):



	As of December 31, 2016			As of March 31, 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		)	(63		)
Total long-term debt⁽¹⁾	$	3,935		$	3,937


⁽¹⁾	Includes the outstanding (and unexchanged) Google Notes issued in 2011 and 2014 and the Alphabet notes exchanged in 2016.

The effective interest yields based on proceeds received from the outstanding notes due in 2021, 2024, and 2026 were 3.734%, 3.377%, and 2.231%, respectively, with interest payable semi-annually. We may redeem these notes at any time in whole or in part at specified redemption prices. The total estimated fair value of all outstanding notes was approximately $3.9 billion as of December 31, 2016 and $4.0 billion as of March 31, 2017. 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.

Note 6. Supplemental Financial Statement Information

Property and Equipment, Net

Property and equipment, net, consisted of the following (in millions):



	As of December 31, 2016			As of March 31, 2017
				(unaudited)
Land and buildings	$	19,804		$	20,744
Information technology assets	16,084			17,330
Construction in progress	8,166			8,614
Leasehold improvements	3,415			3,586
Furniture and fixtures	58			47
Property and equipment, gross	47,527			50,321
Less: accumulated depreciation and amortization	(13,293		)	(14,385		)
Property and equipment, net	$	34,234		$	35,936

As of March 31, 2017, assets under capital lease with a cost basis of $327 million were included in property and equipment.



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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 prepaid revenue share, expenses, and other 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%. In March 2017, we received a cash payment of $750 million from Lenovo. The outstanding balances are shown in the table below (in millions):



	As of December 31, 2016			As of March 31, 2017
				(unaudited)
Principal of the Note Receivable	$	1,448		$	698
Less: unamortized discount for the Note Receivable	(51		)	(18		)
Total	$	1,397		$	680

As of December 31, 2016 and March 31, 2017, we did not recognize a valuation allowance on the Note Receivable.

Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consisted of the following (in millions):



	As of December 31, 2016		As of March 31, 2017
			(unaudited)
Accrued customer liabilities	$	1,256	$	1,173
Other accrued expenses and current liabilities	4,888		4,265
Accrued expenses and other current liabilities	$	6,144	$	5,438

Accumulated Other Comprehensive Income (Loss)

The components of AOCI, net of tax, were as follows (in millions, unaudited):



	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	156			356			16			528
Amounts reclassified from AOCI	0			169			(117		)	52
Other comprehensive income (loss)	156			525			(101		)	580
Balance as of March 31, 2016	$	(1,891	)	$	439		$	158		$	(1,294	)



	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	451			139			(229		)	361
Amounts reclassified from AOCI	0			25			(153		)	(128		)
Other comprehensive income (loss)	451			164			(382		)	233
Balance as of March 31, 2017	$	(2,195	)	$	(15	)	$	41		$	(2,169	)



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The effects on net income of amounts reclassified from AOCI were as follows (in millions, unaudited):



		Gains (Losses) Reclassified from AOCI to the Consolidated Statement of Income
			Three Months Ended
			March 31,
AOCI Components	Location		2016			2017
Unrealized gains (losses) on available-for-sale investments
	Other income (expense), net		$	(169	)	$	(25	)
	Provision for income taxes		0			0
	Net of tax		$	(169	)	$	(25	)
Unrealized gains (losses) on cash flow hedges
Foreign exchange contracts	Revenue		$	169		$	217
Interest rate contracts	Other income (expense), net		1			1
	Provision for income taxes		(53		)	(65		)
	Net of tax		$	117		$	153
Total amount reclassified, net of tax			$	(52	)	$	128

Other Income (Expense), Net

The components of other income (expense), net, were as follows (in millions, unaudited):



	Three Months Ended
	March 31,
	2016			2017
Interest income	$	270		$	312
Interest expense	(30		)	(25		)
Foreign currency exchange losses, net	(186		)	(2		)
Loss on marketable securities, net	(167		)	(22		)
Loss on non-marketable investments, net	(113		)	(46		)
Other	13			34
Other income (expense), net	$	(213	)	$	251

Interest expense in the preceding table is net of $0 million and $7 million of interest capitalized for the three months ended March 31, 2016 and 2017, respectively.

Note 7. Acquisitions

During the three months ended March 31, 2017, we completed various acquisitions and purchases of intangible assets for total consideration of approximately $111 million. In aggregate, $6 million was cash acquired, $41 million was attributed to intangible assets, $72 million was attributed to goodwill, and $8 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 goodwill expected to be deductible for tax purposes is approximately $19 million.

Pro forma results 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.

For all intangible assets acquired and purchased during the three months ended March 31, 2017, patents and developed technology have a weighted-average useful life of 3.5 years and trade names and other have a weighted-average useful life of 9.7 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 understanding of the biology that controls lifespan. As of March 31, 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.



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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.

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 March 31, 2017, AbbVie has contributed $750 million to fund the collaboration pursuant to the agreement, which reflects its total commitment. As of March 31, 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 is expected to close in the second half of 2017. The transaction is accounted for as an equity transaction and no gain or loss was recognized. Of the $480 million received, $15 million was recorded as noncontrolling interest, based on Temasek’s share of the net assets of Verily, and $465 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 quarter ended March 31, 2017 as the amounts were not material.

Note 10. Goodwill and Other Intangible Assets

Goodwill

The changes in the carrying amount of goodwill allocated to our disclosed segments for the three months ended March 31, 2017 were as follows (in millions, unaudited):



	Google		Other Bets		Total Consolidated
Balance as of December 31, 2016	$	16,027	$	441	$	16,468
Acquisitions	66		6		72
Foreign currency translation and other adjustments	7		0		7
Balance as of March 31, 2017	$	16,100	$	447	$	16,547



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Other Intangible Assets

Information regarding purchased intangible assets were as follows (in millions):



	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 March 31, 2017
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(unaudited)
Patents and developed technology	$	5,481	$	2,792	$	2,689
Customer relationships	358		218		140
Trade names and other	461		153		308
Total	$	6,300	$	3,163	$	3,137

Amortization expense relating to purchased intangible assets was $216 million and $206 million for the three months ended March 31, 2016 and 2017, respectively.

As of March 31, 2017, expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter was as follows (in millions, unaudited):



Remainder of 2017	$	580
2018	707
2019	598
2020	484
2021	454
Thereafter	314
	$	3,137

Note 11. Contingencies

Legal Matters

Antitrust Investigations

On November 30, 2010, the European Commission's (EC) 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, to which we responded on August 27, 2015. On April 20, 2016, the EC issued an SO regarding certain Android distribution practices. On July 14, 2016, the EC issued a Supplementary SO regarding shopping search results and an SO regarding the syndication of AdSense for Search. We have responded to the SOs and Supplementary SO and continue to respond to the EC's informational requests. 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), the Federal Antimonopoly Service (FAS) of the Russian Federation, 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. In April 2017, Google reached a settlement agreement that resolved FAS’s concerns regarding the distribution practice of Google’s mobile applications on Android smartphones.

Patent and Intellectual Property Claims

We have had patent, copyright, and trademark infringement lawsuits filed against us claiming that certain of our products, services, and technologies infringe the intellectual property rights of others. Adverse results in these lawsuits



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may include awards of substantial monetary damages, costly royalty or licensing agreements, or orders preventing us from offering certain features, functionalities, products, or services, and may also cause us to change our business practices, and require development of 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 could 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 for 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. 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 impact 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 involving competition (such as the pending EC investigations described above), intellectual property, privacy, tax, 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. Such claims, suits, regulatory and government investigations, and other proceedings could result in fines, civil or criminal penalties, or other adverse consequences.

Certain of our outstanding legal matters include speculative claims for substantial or indeterminate amounts of damages. 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 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.



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Note 12. Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share of 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 March 31,
	2016								2017
	Class A			Class B			Class C		Class A			Class B			Class C
Basic net income per share:
Numerator
Allocation of undistributed earnings	$	1,795		$	305		$	2,107	$	2,331		$	371		$	2,724
Denominator
Number of shares used in per share computation	293,383			49,915			344,220		297,150			47,301			347,104
Basic net income per share	$	6.12		$	6.12		$	6.12	$	7.85		$	7.85		$	7.85
Diluted net income per share:
Numerator
Allocation of undistributed earnings for basic computation	$	1,795		$	305		$	2,107	$	2,331		371			$	2,724
Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares	305			0			0		371			0			0
Reallocation of undistributed earnings	(20		)	(5		)	20		(29		)	(5		)	29
Allocation of undistributed earnings	$	2,080		$	300		$	2,127	$	2,673		$	366		$	2,753
Denominator
Number of shares used in basic computation	293,383			49,915			344,220		297,150			47,301			347,104
Weighted-average effect of dilutive securities
Add:
Conversion of Class B to Class A common shares outstanding	49,915			0			0		47,301			0			0
Restricted stock units and other contingently issuable shares	2,515			0			9,278		1,419			0			9,062
Number of shares used in per share computation	345,813			49,915			353,498		345,870			47,301			356,166
Diluted net income per share	$	6.02		$	6.02		$	6.02	$	7.73		$	7.73		$	7.73

For the periods presented above, the net income per share amounts are the same for Class A and Class B common stock and Class C capital 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 13. Stockholders’ Equity

Stock-Based Compensation

For the three months ended March 31, 2016 and 2017, total stock-based compensation expense was $1,500 million and $2,065 million, respectively, including amounts associated with awards that we expect to settle in Alphabet stock of $1,494 million and $2,009 million, respectively.



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Stock-Based Award Activities

The following table summarizes the activities for our unvested restricted stock units (RSUs) for the three months ended March 31, 2017 (unaudited):