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, 2019

OR

¨ 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 every Interactive Data File required to be submitted 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 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 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.

Large accelerated filer	ý	Accelerated filer	¨
Non-accelerated filer	¨	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 22, 2019, there were 299,436,023 shares of Alphabet’s Class A common stock outstanding, 46,544,284 shares of Alphabet's Class B common stock outstanding, and 348,263,508 shares of Alphabet's Class C capital stock outstanding.

Table of Contents Alphabet Inc.

Alphabet Inc.

Form 10-Q

For the Quarterly Period Ended March 31, 2019

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, 2018 and March 31, 2019	3
	Consolidated Statements of Income - Three Months Ended March 31, 2018 and 2019	4
	Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2018 and 2019	5
	Consolidated Statements of Stockholders' Equity - Three Months Ended March 31, 2018 and 2019	6
	Consolidated Statements of Cash Flows - Three Months Ended March 31, 2018 and 2019	7
	Notes to Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4	Controls and Procedures	42
PART II. OTHER INFORMATION
Item 1	Legal Proceedings	43
Item 1A	Risk Factors	43
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 6	Exhibits	44
Signature		45

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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 and operating margin;

• 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 our revenue growth, as well as the change in paid clicks and cost-per-click on Google properties and the change in impressions and cost-per-impression on Google Network Members’ properties, 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 (R&D) 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 (TAC) and the associated TAC rates will fluctuate in the future;

• 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 the portion of our revenues that we derive from non-advertising revenues will continue to increase and may affect margins;

• our expectation that our other income (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;

• the sufficiency of our sources of funding;

• fluctuations in our capital expenditures;

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

• the sufficiency and timing of our proposed remedies in response to the European Commission's (EC) decisions;

• the expected timing and amount of Alphabet Inc.'s share 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, 2018, as amended and 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, 2018, as amended, 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.

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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, 2018			As of March 31, 2019
				(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	16,701		$	19,148
Marketable securities	92,439			94,340
Total cash, cash equivalents, and marketable securities	109,140			113,488
Accounts receivable, net of allowance of $729 and $761	20,838			19,149
Income taxes receivable, net	355			111
Inventory	1,107			1,053
Other current assets	4,236			4,406
Total current assets	135,676			138,207
Non-marketable investments	13,859			14,474
Deferred income taxes	737			750
Property and equipment, net	59,719			60,528
Operating lease assets	0			8,837
Intangible assets, net	2,220			2,063
Goodwill	17,888			17,943
Other non-current assets	2,693			2,547
Total assets	$	232,792		$	245,349
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,378		$	3,710
Accrued compensation and benefits	6,839			5,072
Accrued expenses and other current liabilities	16,958			19,382
Accrued revenue share	4,592			4,318
Deferred revenue	1,784			1,667
Income taxes payable, net	69			761
Total current liabilities	34,620			34,910
Long-term debt	4,012			4,066
Deferred revenue, non-current	396			391
Income taxes payable, non-current	11,327			11,605
Deferred income taxes	1,264			1,282
Operating lease liabilities	0			8,206
Other long-term liabilities	3,545			1,417
Total liabilities	55,164			61,877
Commitments and Contingencies (Note 10)
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); 695,556 (Class A 299,242, Class B 46,636, Class C 349,678) and 694,782 (Class A 299,444, Class B 46,527, Class C 348,811) shares issued and outstanding	45,049			46,532
Accumulated other comprehensive loss	(2,306		)	(1,780		)
Retained earnings	134,885			138,720
Total stockholders’ equity	177,628			183,472
Total liabilities and stockholders’ equity	$	232,792		$	245,349

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,
	2018		2019
Revenues	$	31,146	$	36,339
Costs and expenses:
Cost of revenues	13,467		16,012
Research and development	5,039		6,029
Sales and marketing	3,604		3,905
General and administrative	1,403		2,088
European Commission fine	0		1,697
Total costs and expenses	23,513		29,731
Income from operations	7,633		6,608
Other income (expense), net	2,910		1,538
Income before income taxes	10,543		8,146
Provision for income taxes	1,142		1,489
Net income	$	9,401	$	6,657
Basic net income per share of Class A and B common stock and Class C capital stock	$	13.53	$	9.58
Diluted net income per share of Class A and B common stock and Class C capital stock	$	13.33	$	9.50

See accompanying notes.

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Alphabet Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions; unaudited)

	Three Months Ended
	March 31,
	2018			2019
Net income	$	9,401		$	6,657
Other comprehensive income:
Change in foreign currency translation adjustment	657			(36		)
Available-for-sale investments:
Change in net unrealized gains (losses)	(208		)	719
Less: reclassification adjustment for net (gains) losses included in net income	39			7
Net change (net of tax effect of $0 and $88)	(169		)	726
Cash flow hedges:
Change in net unrealized gains (losses)	(262		)	(30		)
Less: reclassification adjustment for net (gains) losses included in net income	194			(104		)
Net change (net of tax effect of $12 and $1)	(68		)	(134		)
Other comprehensive income	420			556
Comprehensive income	$	9,821		$	7,213

See accompanying notes.

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Alphabet Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions, except share amounts which are reflected in thousands; unaudited)

	Three Months Ended March 31, 2018
	Class A and Class B Common Stock, Class C Capital Stock and Additional Paid-In Capital					Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders’ Equity
	Shares		Amount
Balance as of December 31, 2017	694,783		$	40,247		$	(992	)	$	113,247		$	152,502
Cumulative effect of accounting change	0		0			(98		)	(599		)	(697		)
Common and capital stock issued	2,144		51			0			0			51
Stock-based compensation expense	0		2,457			0			0			2,457
Tax withholding related to vesting of restricted stock units and other	0		(1,136		)	0			0			(1,136		)
Repurchases of capital stock	(1,982	)	(132		)	0			(2,041		)	(2,173		)
Sale of subsidiary shares	0		0			0			0			0
Net income	0		0			0			9,401			9,401
Other comprehensive income	0		0			420			0			420
Balance as of March 31, 2018	694,945		$	41,487		$	(670	)	$	120,008		$	160,825

	Three Months Ended March 31, 2019
	Class A and Class B Common Stock, Class C Capital Stock and Additional Paid-In Capital					Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders’ Equity
	Shares		Amount
Balance as of December 31, 2018	695,556		$	45,049		$	(2,306	)	$	134,885		$	177,628
Cumulative effect of accounting change	0		0			(30		)	(4		)	(34		)
Common and capital stock issued	1,912		39			0			0			39
Stock-based compensation expense	0		2,788			0			0			2,788
Tax withholding related to vesting of restricted stock units and other	0		(1,184		)	0			0			(1,184		)
Repurchases of capital stock	(2,686	)	(207		)	0			(2,818		)	(3,025		)
Sale of subsidiary shares	0		47			0			0			47
Net income	0		0			0			6,657			6,657
Other comprehensive income	0		0			556			0			556
Balance as of March 31, 2019	694,782		$	46,532		$	(1,780	)	$	138,720		$	183,472

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Alphabet Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions; unaudited)

	Three Months Ended
	March 31,
	2018			2019
Operating activities
Net income	$	9,401		$	6,657
Adjustments:
Depreciation and impairment of property and equipment	1,791			2,416
Amortization and impairment of intangible assets	195			197
Stock-based compensation expense	2,457			2,769
Deferred income taxes	(18		)	(73		)
Gain on debt and equity securities, net	(2,992		)	(1,081		)
Other	(257		)	22
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable	1,700			1,172
Income taxes, net	782			1,068
Other assets	(241		)	(265		)
Accounts payable	122			(425		)
Accrued expenses and other liabilities	(1,142		)	(229		)
Accrued revenue share	(286		)	(147		)
Deferred revenue	130			(81		)
Net cash provided by operating activities	11,642			12,000
Investing activities
Purchases of property and equipment	(7,299		)	(4,638		)
Proceeds from disposals of property and equipment	30			34
Purchases of marketable securities	(8,849		)	(20,883		)
Maturities and sales of marketable securities	9,351			21,006
Purchases of non-marketable investments	(327		)	(907		)
Maturities and sales of non-marketable investments	498			99
Acquisitions, net of cash acquired, and purchases of intangible assets	(1,250		)	(99		)
Net cash used in investing activities	(7,846		)	(5,388		)
Financing activities
Net payments related to stock-based award activities	(1,158		)	(1,175		)
Repurchases of capital stock	(2,173		)	(3,025		)
Proceeds from issuance of debt, net of costs	4,691			315
Repayments of debt	(3,378		)	(345		)
Proceeds from sale of subsidiary shares	0			47
Net cash used in financing activities	(2,018		)	(4,183		)
Effect of exchange rate changes on cash and cash equivalents	165			18
Net increase in cash and cash equivalents	1,943			2,447
Cash and cash equivalents at beginning of period	10,715			16,701
Cash and cash equivalents at end of period	$	12,658		$	19,148

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 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) 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 entities consolidated under the variable interest and voting models. Noncontrolling interests are not presented separately as the amounts are not material. All intercompany balances and transactions have been eliminated.

Unaudited Interim Financial Information

The Consolidated Balance Sheet as of March 31, 2019, the Consolidated Statements of Income for the three months ended March 31, 2018 and 2019, the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2019, the Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2018 and 2019 and the Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2019 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, 2019, our results of operations for the three months ended March 31, 2018 and 2019, and our cash flows for the three months ended March 31, 2018 and 2019. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019.

These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended, filed with the SEC.

Use of Estimates

Preparation of 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 bad debt allowance, 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.

Recent Accounting Pronouncements

Recently issued accounting pronouncements not yet adopted

In June 2016, the Financial Accounting Standards Board (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 model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. We will adopt ASU 2016-13 effective January 1, 2020 with the cumulative effect of adoption recorded as an adjustment to retained earnings. We are currently evaluating new credit loss models and updating our processes and controls in preparation for the adoption of ASU 2016-13. The effect on our consolidated financial statements will largely depend on the composition and credit quality of our investment portfolio and the economic conditions at the time of adoption.

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Recently adopted accounting pronouncements

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (Topic 842) "Leases." Topic 842 supersedes the lease requirements in Accounting Standards Codification 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.

We adopted Topic 842 effective January 1, 2019. The most significant effects of Topic 842 were the recognition of $8.0 billion of operating lease assets and $8.4 billion of operating lease liabilities and the de-recognition of $1.5 billion of build-to-suit assets and liabilities. We applied Topic 842 to all leases as of January 1, 2019 with comparative periods continuing to be reported under Topic 840. In the adoption of Topic 842, we carried forward the assessment from Topic 840 of whether our contracts contain or are leases, the classification of our leases, and remaining lease terms. Our accounting for finance leases remains substantially unchanged. The standard does not have a significant effect on our consolidated results of operations or cash flows. See Note 4 for further details.

Prior Period Reclassifications

Certain amounts in prior periods have been reclassified to conform with current period presentation. Performance fees have been reclassified for all periods from general and administrative expenses to other income (expense), net to align with the presentation of the investment gains and losses on which the performance fees are based. See Note 13 for further details.

Note 2. Revenues

Disaggregated Revenues

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,
	2018		2019
Google properties	$	21,998	$	25,682
Google Network Members' properties	4,644		5,038
Google advertising revenues	26,642		30,720
Google other revenues	4,354		5,449
Other Bets revenues	150		170
Total revenues(1)	$	31,146	$	36,339

⁽¹⁾  Revenues include hedging gains (losses) of $(239) million and $137 million for the three months ended March 31, 2018 and 2019, respectively, which do not represent revenues recognized from contracts with customers.

The following table presents our revenues disaggregated by geography, based on the addresses of our customers (in millions, unaudited):

	Three Months Ended
	March 31,
	2018				2019
United States	$	14,144	45	%	$	16,532	45	%
EMEA(1)	10,474		34		11,791		33
APAC(1)	4,804		15		6,112		17
Other Americas(1)	1,724		6		1,904		5
Total revenues(2)	$	31,146	100	%	$	36,339	100	%

⁽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 months ended March 31, 2018 and 2019.

Deferred Revenues

We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The decrease in the deferred revenue balance for the three months ended March 31, 2019 was primarily driven by the recognition of $826 million of revenues that were included in the deferred revenue

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balance as of December 31, 2018, offset by cash payments received or due in advance of satisfying our performance obligations.

Note 3. Financial Instruments

Debt Securities

We classify our marketable debt securities within 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 fair value.

The following tables summarize our debt securities by significant investment categories as of December 31, 2018 and March 31, 2019 (in millions):

	As of December 31, 2018
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash and Cash Equivalents		Marketable Securities
Level 2:
Time deposits(1)	$	2,202	$	0	$	0		$	2,202	$	2,202	$	0
Government bonds	53,634		71		(414		)	53,291		3,717		49,574
Corporate debt securities	25,383		15		(316		)	25,082		44		25,038
Mortgage-backed and asset-backed securities	16,918		11		(324		)	16,605		0		16,605
Total	$	98,137	$	97	$	(1,054	)	$	97,180	$	5,963	$	91,217

	As of March 31, 2019
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Cash and Cash Equivalents		Marketable Securities
	(unaudited)
Level 2:
Time deposits(1)	$	2,612	$	0	$	0		$	2,612	$	2,598	$	14
Government bonds	54,291		195		(206		)	54,280		4,114		50,166
Corporate debt securities	25,482		128		(109		)	25,501		8		25,493
Mortgage-backed and asset-backed securities	16,465		36		(188		)	16,313		0		16,313
Total	$	98,850	$	359	$	(503	)	$	98,706	$	6,720	$	91,986

⁽¹⁾  The majority of our time deposits are domestic deposits.

We determine realized gains or losses on the sale or extinguishment of debt securities on a specific identification method. We recognized gross realized gains of $2 million and $46 million for the three months ended March 31, 2018 and 2019, respectively. We recognized gross realized losses of $41 million and $48 million for the three months ended March 31, 2018 and 2019, respectively. We reflect these gains and losses as a component of other income (expense), net, in the Consolidated Statements of Income.

The following table summarizes the estimated fair value of our investments in marketable debt securities with stated contractual maturity dates, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities (in millions, unaudited):

	As of March 31, 2019
Due in 1 year	$	21,969
Due in 1 year through 5 years	57,477
Due in 5 years through 10 years	2,522
Due after 10 years	10,018
Total	$	91,986

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The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 2018 and March 31, 2019, 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, 2018
	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Government bonds	$	12,019	$	(85	)	$	23,877	$	(329	)	$	35,896	$	(414	)
Corporate debt securities	10,171		(107		)	11,545		(209		)	21,716		(316		)
Mortgage-backed and asset-backed securities	5,534		(75		)	8,519		(249		)	14,053		(324		)
Total	$	27,724	$	(267	)	$	43,941	$	(787	)	$	71,665	$	(1,054	)

	As of March 31, 2019
	Less than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(unaudited)
Government bonds	$	1,089	$	(1	)	$	24,177	$	(205	)	$	25,266	$	(206	)
Corporate debt securities	1,503		(5		)	13,503		(104		)	15,006		(109		)
Mortgage-backed and asset-backed securities	899		(2		)	10,361		(186		)	11,260		(188		)
Total	$	3,491	$	(8	)	$	48,041	$	(495	)	$	51,532	$	(503	)

During the three months ended March 31, 2018 and 2019, we did not recognize any significant other-than-temporary impairment losses. Losses on impairment are included as a component of other income (expense), net, in the Consolidated Statements of Income. See Note 7 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.

Marketable equity securities

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.

The following table summarizes marketable equity securities measured at fair value by significant investment categories as of December 31, 2018 and March 31, 2019 (in millions):

	As of December 31, 2018
	Cash and Cash Equivalents		Marketable Securities
Level 1:
Money market funds	$	3,493	$	0
Marketable equity securities	0		994
	3,493		994
Level 2:
Mutual funds	0		228
Total	$	3,493	$	1,222

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	As of March 31, 2019
	(unaudited)
	Cash and Cash Equivalents		Marketable Securities
Level 1:
Money market funds	$	6,452	$	0
Marketable equity securities(1)	0		2,115
	6,452		2,115
Level 2:
Mutual funds	0		239
Total	$	6,452	$	2,354

⁽¹⁾  Includes an investment that was reclassified from non-marketable equity securities following the initial public offering of the issuer.

Non-marketable equity securities

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 for observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). All gains and losses on non-marketable equity securities, realized and unrealized, are recognized in other income (expense), net. Non-marketable equity securities that have been remeasured are classified within Level 3 in the fair value hierarchy because we estimate the value based on valuation methods using the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the securities we hold.

The following is a summary of unrealized gains and losses recorded in other income (expense), net, and included as adjustments to the carrying value of non-marketable equity securities (in millions, unaudited):

	Three Months Ended
	March 31,
	2018			2019
Unrealized gains	$	2,511		$	456
Unrealized losses (including impairment)	(23		)	(66		)
Total unrealized gain (loss) for non-marketable equity securities	$	2,488		$	390

The following table summarizes the total carrying value of our non-marketable equity securities held as of March 31, 2019 including cumulative unrealized gains and losses (in millions, unaudited):

Initial cost basis	$	8,561
Unrealized gains	4,634
Unrealized losses (including impairment)	(248		)
Total carrying value at the end of the period	$	12,947

During the three months ended March 31, 2019, included in the $12.9 billion of non-marketable equity securities, $1.4 billion were measured at fair value based on observable market transactions, resulting in a net unrealized gain of $390 million.

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Gains and losses on marketable and non-marketable equity securities

Gains and losses for our marketable and non-marketable equity securities are summarized below (in millions, unaudited):

	Three Months Ended
	March 31,
	2018		2019
Net gain (loss) on equity securities sold during the period	$	387	$	42
Unrealized gain (loss) on equity securities held as of the end of the period(1)	2,644		1,041
Total gain (loss) recognized in other income (expense), net	$	3,031	$	1,083

⁽¹⁾  Includes $2,488 million and $390 million related to non-marketable equity securities for the three months ended March 31, 2018 and 2019, respectively.

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. The cumulative net gain measured as the sale price less the initial purchase price for equity securities sold during the period ending March 31, 2019 was $118 million.

Equity securities accounted for under the Equity Method

Equity securities accounted for under the equity method had a carrying value of approximately $1.3 billion as of December 31, 2018 and March 31, 2019. Our share of gains and losses including impairment are included as a component of other income (expense), net. See Note 7 for further details on other income (expense), net.

Derivative Financial Instruments

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.

We recognize derivative instruments as either assets or liabilities in the Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives in the Consolidated Statements of Income as either other income (expense), net, or revenues, or in the Consolidated Balance Sheets in accumulated other comprehensive income (AOCI), as discussed below. Any components excluded from the assessment of hedge effectiveness are recognized in the same income statement line as the hedged item.

We enter into foreign currency contracts with financial institutions 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 use 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, 2018 and March 31, 2019, we received cash collateral related to the derivative instruments under our collateral security arrangements of $327 million and $518 million, respectively, which was included in other current assets.

Cash Flow Hedges

We use foreign currency forwards and option contracts, including collars (an option strategy comprised of a combination of purchased and written options), designated as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the U.S. dollar. The notional principal of these contracts was approximately $11.8 billion and $12.4 billion as of December 31, 2018 and March 31, 2019, respectively. These contracts have maturities of 24 months or less.

For forwards and option contracts, we exclude the change in the 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. We reflect the gains or losses of a cash flow hedge included in our assessment of hedge effectiveness as a component of AOCI and subsequently reclassify these gains and losses to revenues when the hedged transactions are recorded. If the hedged transactions

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become probable of not occurring, the corresponding amounts in AOCI are immediately reclassified to other income (expense), net.

As of March 31, 2019, the net accumulated gain on our foreign currency cash flow hedges before tax effect was $113 million, which 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. We recognize changes in the excluded component in other income (expense), net. The notional principal of these contracts was $2.0 billion as of both December 31, 2018 and March 31, 2019.

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

Net Investment Hedges

We use forward contracts designated as net investment hedges to hedge the foreign currency risks related to our investment in foreign subsidiaries. We exclude changes in forward points for the forward contracts from the assessment of hedge effectiveness. We recognize changes in the excluded component in other income (expense), net. The notional principal of these contracts was $6.7 billion and $7.1 billion as of December 31, 2018 and March 31, 2019, respectively.

Gains and losses on these forward contracts are recognized in AOCI as part of the foreign currency translation adjustment.

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 the outstanding foreign exchange contracts was $20.1 billion and $18.6 billion as of December 31, 2018 and March 31, 2019, respectively.

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

		As of December 31, 2018
	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	$	459	$	54	$	513
Total		$	459	$	54	$	513
Derivative Liabilities:
Level 2:
Foreign exchange contracts	Accrued expenses and other liabilities, current and non-current	$	5	$	228	$	233
Total		$	5	$	228	$	233

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		As of March 31, 2019
	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	$	475	$	15	$	490
Total		$	475	$	15	$	490
Derivative Liabilities:
Level 2:
Foreign exchange contracts	Accrued expenses and other liabilities, current and non-current	$	13	$	348	$	361
Total		$	13	$	348	$	361

The gains (losses) on derivatives in cash flow hedging and net investment hedging relationships recognized in other comprehensive income (OCI) are summarized below (in millions, unaudited):

	Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect
	Three Months Ended
	March 31,
	2018			2019
Derivatives in Cash Flow Hedging Relationship:
Foreign exchange contracts
Amount included in the assessment of effectiveness	$	(319	)	$	(6	)
Amount excluded from the assessment of effectiveness	(7		)	(30		)
Derivatives in Net Investment Hedging Relationship:
Foreign exchange contracts
Amount included in the assessment of effectiveness	0			64
Total	$	(326	)	$	28

 

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The effect of derivative instruments on income is summarized below (in millions, unaudited):

	Gains (Losses) Recognized in Income
	Three Months Ended
	March 31,
	2018						2019
	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	$	31,146		$	2,910		$	36,339	$	1,538
Gains (Losses) on Derivatives in Cash Flow Hedging Relationship:
Foreign exchange contracts
Amount of gains (losses) reclassified from AOCI to income	$	(247	)	$	0		$	128	$	0
Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach	8			0			9		0
Gains (Losses) on Derivatives in Fair Value Hedging Relationship:
Foreign exchange contracts
Hedged items	0			113			0		22
Derivatives designated as hedging instruments	0			(113		)	0		(22		)
Amount excluded from the assessment of effectiveness	0			11			0		10
Gains (Losses) on Derivatives in Net Investment Hedging Relationship:
Foreign exchange contracts
Amount excluded from the assessment of effectiveness	0