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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________________________________
FORM 10-Q
________________________________________________________________________________________
(Mark One)
|
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 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 Ampitheatre Parkway
Mountain View, CA 94043
(Address of principal executive offices, including zip code)
(650) 253-000
(Registrant's telephone number, including area code)
|
| | |
Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock, $0.001 par value | GOOGL | Nasdaq Stock Market LLC |
| | (Nasdaq Global Select Market) |
Class C Capital Stock, $0.001 par value | GOOG | Nasdaq Stock Market LLC |
| | (Nasdaq Global Select Market) |
________________________________________________________________________________________
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 ☒ 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 ☒ 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 | ☒ | | 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 ☒
As of July 19, 2019, there were 299,531,683 shares of Alphabet’s Class A common stock outstanding, 46,522,084 shares of Alphabet's Class B common stock outstanding, and 347,344,583 shares of Alphabet's Class C capital stock outstanding.
Alphabet Inc.
Form 10-Q
For the Quarterly Period Ended June 30, 2019
TABLE OF CONTENTS
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| | Page No. |
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Item 1 | | |
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Item 2 | | |
Item 3 | | |
Item 4 | | |
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Item 1 | | |
Item 1A | | |
Item 2 | | |
Item 5 | | |
Item 6 | | |
| |
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.
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.
| |
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 June 30, 2019 |
| | | (unaudited) |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 16,701 |
| | $ | 16,587 |
|
Marketable securities | 92,439 |
| | 104,469 |
|
Total cash, cash equivalents, and marketable securities | 109,140 |
| | 121,056 |
|
Accounts receivable, net of allowance of $729 and $721 | 20,838 |
| | 20,965 |
|
Income taxes receivable, net | 355 |
| | 352 |
|
Inventory | 1,107 |
| | 964 |
|
Other current assets | 4,236 |
| | 4,100 |
|
Total current assets | 135,676 |
| | 147,437 |
|
Non-marketable investments | 13,859 |
| | 12,112 |
|
Deferred income taxes | 737 |
| | 585 |
|
Property and equipment, net | 59,719 |
| | 64,891 |
|
Operating lease assets | 0 |
| | 9,713 |
|
Intangible assets, net | 2,220 |
| | 1,902 |
|
Goodwill | 17,888 |
| | 18,000 |
|
Other non-current assets | 2,693 |
| | 2,461 |
|
Total assets | $ | 232,792 |
| | $ | 257,101 |
|
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 4,378 |
| | $ | 3,925 |
|
Accrued compensation and benefits | 6,839 |
| | 6,432 |
|
Accrued expenses and other current liabilities | 16,958 |
| | 19,823 |
|
Accrued revenue share | 4,592 |
| | 4,567 |
|
Deferred revenue | 1,784 |
| | 1,717 |
|
Income taxes payable, net | 69 |
| | 536 |
|
Total current liabilities | 34,620 |
| | 37,000 |
|
Long-term debt | 4,012 |
| | 4,074 |
|
Deferred revenue, non-current | 396 |
| | 387 |
|
Income taxes payable, non-current | 11,327 |
| | 10,969 |
|
Deferred income taxes | 1,264 |
| | 1,892 |
|
Operating lease liabilities | 0 |
| | 9,088 |
|
Other long-term liabilities | 3,545 |
| | 1,499 |
|
Total liabilities | 55,164 |
| | 64,909 |
|
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 694,050 (Class A 299,520, Class B 46,522, Class C 348,008) shares issued and outstanding | 45,049 |
| | 47,937 |
|
Accumulated other comprehensive loss | (2,306 | ) | | (1,091 | ) |
Retained earnings | 134,885 |
| | 145,346 |
|
Total stockholders’ equity | 177,628 |
| | 192,192 |
|
Total liabilities and stockholders’ equity | $ | 232,792 |
| | $ | 257,101 |
|
See accompanying notes.
Alphabet Inc.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts; unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2019 | | 2018 | | 2019 |
Revenues | $ | 32,657 |
| | $ | 38,944 |
| | $ | 63,803 |
| | $ | 75,283 |
|
Costs and expenses: | | | | | | | |
Cost of revenues | 13,883 |
| | 17,296 |
| | 27,350 |
| | 33,308 |
|
Research and development | 5,114 |
| | 6,213 |
| | 10,153 |
| | 12,242 |
|
Sales and marketing | 3,780 |
| | 4,212 |
| | 7,384 |
| | 8,117 |
|
General and administrative | 1,764 |
| | 2,043 |
| | 3,167 |
| | 4,131 |
|
European Commission fines | 5,071 |
| | 0 |
| | 5,071 |
| | 1,697 |
|
Total costs and expenses | 29,612 |
| | 29,764 |
| | 53,125 |
| | 59,495 |
|
Income from operations | 3,045 |
| | 9,180 |
| | 10,678 |
| | 15,788 |
|
Other income (expense), net | 1,170 |
| | 2,967 |
| | 4,080 |
| | 4,505 |
|
Income before income taxes | 4,215 |
| | 12,147 |
| | 14,758 |
| | 20,293 |
|
Provision for income taxes | 1,020 |
| | 2,200 |
| | 2,162 |
| | 3,689 |
|
Net income | $ | 3,195 |
| | $ | 9,947 |
| | $ | 12,596 |
| | $ | 16,604 |
|
| | | | | | | |
Basic net income per share of Class A and B common stock and Class C capital stock | $ | 4.60 |
| | $ | 14.33 |
| | $ | 18.13 |
| | $ | 23.91 |
|
Diluted net income per share of Class A and B common stock and Class C capital stock | $ | 4.54 |
| | $ | 14.21 |
| | $ | 17.89 |
| | $ | 23.71 |
|
See accompanying notes.
Alphabet Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions; unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2019 | | 2018 | | 2019 |
Net income | $ | 3,195 |
| | $ | 9,947 |
| | $ | 12,596 |
| | $ | 16,604 |
|
Other comprehensive income (loss): | | | | | | | |
Change in foreign currency translation adjustment | (1,142 | ) | | 118 |
| | (485 | ) | | 82 |
|
Available-for-sale investments: | | | | | | | |
Change in net unrealized gains (losses) | (148 | ) | | 741 |
| | (356 | ) | | 1,460 |
|
Less: reclassification adjustment for net (gains) losses included in net income | (6 | ) | | (75 | ) | | 33 |
| | (68 | ) |
Net change (net of tax effect of $60, $103, $60, and $191) | (154 | ) | | 666 |
| | (323 | ) | | 1,392 |
|
Cash flow hedges: | | | | | | | |
Change in net unrealized gains (losses) | 363 |
| | (25 | ) | | 101 |
| | (55 | ) |
Less: reclassification adjustment for net (gains) losses included in net income | 78 |
| | (70 | ) | | 272 |
| | (174 | ) |
Net change (net of tax effect of $109, $22, $97, and $23) | 441 |
| | (95 | ) | | 373 |
| | (229 | ) |
Other comprehensive income (loss) | (855 | ) | | 689 |
| | (435 | ) | | 1,245 |
|
Comprehensive income | $ | 2,340 |
| | $ | 10,636 |
| | $ | 12,161 |
| | $ | 17,849 |
|
See accompanying notes.
Alphabet Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except share amounts which are reflected in thousands; unaudited)
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 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 March 31, 2018 | 694,945 |
| | $ | 41,487 |
| | $ | (670 | ) | | $ | 120,008 |
| | $ | 160,825 |
|
Common and capital stock issued | 2,909 |
| | 64 |
| | 0 |
| | 0 |
| | 64 |
|
Stock-based compensation expense | 0 |
| | 2,413 |
| | 0 |
| | 0 |
| | 2,413 |
|
Tax withholding related to vesting of restricted stock units and other | 0 |
| | (1,590 | ) | | 0 |
| | 0 |
| | (1,590 | ) |
Repurchases of capital stock | (1,908 | ) | | (131 | ) | | 0 |
| | (1,921 | ) | | (2,052 | ) |
Sale of subsidiary shares | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Net income | 0 |
| | 0 |
| | 0 |
| | 3,195 |
| | 3,195 |
|
Other comprehensive income (loss) | 0 |
| | 0 |
| | (855 | ) | | 0 |
| | (855 | ) |
Balance as of June 30, 2018 | 695,946 |
| | $ | 42,243 |
| | $ | (1,525 | ) | | $ | 121,282 |
| | $ | 162,000 |
|
|
| | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 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 | 5,053 |
| | 115 |
| | 0 |
| | 0 |
| | 115 |
|
Stock-based compensation expense | 0 |
| | 4,870 |
| | 0 |
| | 0 |
| | 4,870 |
|
Tax withholding related to vesting of restricted stock units and other | 0 |
| | (2,726 | ) | | 0 |
| | 0 |
| | (2,726 | ) |
Repurchases of capital stock | (3,890 | ) | | (263 | ) | | 0 |
| | (3,962 | ) | | (4,225 | ) |
Sale of subsidiary shares | 0 |
| | 0 |
| | 0 |
| | 0 |
| | — |
|
Net income | 0 |
| | 0 |
| | 0 |
| | 12,596 |
| | 12,596 |
|
Other comprehensive income (loss) | 0 |
| | 0 |
| | (435 | ) | | 0 |
| | (435 | ) |
Balance as of June 30, 2018 | 695,946 |
| | $ | 42,243 |
| | $ | (1,525 | ) | | $ | 121,282 |
| | $ | 162,000 |
|
See accompanying notes.
Alphabet Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except share amounts which are reflected in thousands; unaudited)
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 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 March 31, 2019 | 694,782 |
| | $ | 46,532 |
| | $ | (1,780 | ) | | $ | 138,720 |
| | $ | 183,472 |
|
Common and capital stock issued | 2,403 |
| | 34 |
| | 0 |
| | 0 |
| | 34 |
|
Stock-based compensation expense | 0 |
| | 2,782 |
| | 0 |
| | 0 |
| | 2,782 |
|
Tax withholding related to vesting of restricted stock units and other | 0 |
| | (1,268 | ) | | 0 |
| | 0 |
| | (1,268 | ) |
Repurchases of capital stock | (3,135 | ) | | (256 | ) | | 0 |
| | (3,321 | ) | | (3,577 | ) |
Sale of subsidiary shares | 0 |
| | 113 |
| | 0 |
| | 0 |
| | 113 |
|
Net income | 0 |
| | 0 |
| | 0 |
| | 9,947 |
| | 9,947 |
|
Other comprehensive income (loss) | 0 |
| | 0 |
| | 689 |
| | 0 |
| | 689 |
|
Balance as of June 30, 2019 | 694,050 |
| | $ | 47,937 |
| | $ | (1,091 | ) | | $ | 145,346 |
| | $ | 192,192 |
|
|
| | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 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 | 4,315 |
| | 73 |
| | 0 |
| | 0 |
| | 73 |
|
Stock-based compensation expense | 0 |
| | 5,570 |
| | 0 |
| | 0 |
| | 5,570 |
|
Tax withholding related to vesting of restricted stock units and other | 0 |
| | (2,452 | ) | | 0 |
| | 0 |
| | (2,452 | ) |
Repurchases of capital stock | (5,821 | ) | | (463 | ) | | 0 |
| | (6,139 | ) | | (6,602 | ) |
Sale of subsidiary shares | 0 |
| | 160 |
| | 0 |
| | 0 |
| | 160 |
|
Net income | 0 |
| | 0 |
| | 0 |
| | 16,604 |
| | 16,604 |
|
Other comprehensive income (loss) | 0 |
| | 0 |
| | 1,245 |
| | 0 |
| | 1,245 |
|
Balance as of June 30, 2019 | 694,050 |
| | $ | 47,937 |
| | $ | (1,091 | ) | | $ | 145,346 |
| | $ | 192,192 |
|
See accompanying notes.
Alphabet Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions; unaudited)
|
| | | | | | | |
| Six Months Ended |
| June 30, |
| 2018 | | 2019 |
Operating activities | | | |
Net income | $ | 12,596 |
| | $ | 16,604 |
|
Adjustments: | | | |
Depreciation and impairment of property and equipment | 3,653 |
| | 5,042 |
|
Amortization and impairment of intangible assets | 447 |
| | 406 |
|
Stock-based compensation expense | 4,870 |
| | 5,525 |
|
Deferred income taxes | (157 | ) | | 620 |
|
Gain on debt and equity securities, net | (4,060 | ) | | (3,878 | ) |
Other | (120 | ) | | (48 | ) |
Changes in assets and liabilities, net of effects of acquisitions: | | | |
Accounts receivable | 1,388 |
| | 26 |
|
Income taxes, net | (656 | ) | | 25 |
|
Other assets | (756 | ) | | (176 | ) |
Accounts payable | (23 | ) | | (443 | ) |
Accrued expenses and other liabilities | 4,600 |
| | 1,074 |
|
Accrued revenue share | (303 | ) | | (60 | ) |
Deferred revenue | 295 |
| | (90 | ) |
Net cash provided by operating activities | 21,774 |
| | 24,627 |
|
Investing activities | | | |
Purchases of property and equipment | (12,776 | ) | | (10,764 | ) |
Purchases of marketable securities | (23,041 | ) | | (44,724 | ) |
Maturities and sales of marketable securities | 25,523 |
| | 40,692 |
|
Purchases of non-marketable investments | (732 | ) | | (1,095 | ) |
Maturities and sales of non-marketable investments | 1,191 |
| | 206 |
|
Acquisitions, net of cash acquired, and purchases of intangible assets | (1,434 | ) | | (247 | ) |
Other investing activities | 49 |
| | 89 |
|
Net cash used in investing activities | (11,220 | ) | | (15,843 | ) |
Financing activities | | | |
Net payments related to stock-based award activities | (2,699 | ) | | (2,435 | ) |
Repurchases of capital stock | (4,225 | ) | | (6,602 | ) |
Proceeds from issuance of debt, net of costs | 6,236 |
| | 317 |
|
Repayments of debt | (6,267 | ) | | (393 | ) |
Proceeds from sale of subsidiary shares | 0 |
| | 184 |
|
Net cash used in financing activities | (6,955 | ) | | (8,929 | ) |
Effect of exchange rate changes on cash and cash equivalents | (166 | ) | | 31 |
|
Net increase (decrease) in cash and cash equivalents | 3,433 |
| | (114 | ) |
Cash and cash equivalents at beginning of period | 10,715 |
| | 16,701 |
|
Cash and cash equivalents at end of period | $ | 14,148 |
| | $ | 16,587 |
|
See accompanying notes.
Alphabet Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Google 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 June 30, 2019, the Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2019, the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2019, the Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2018 and 2019 and the Consolidated Statements of Cash Flows for the six months ended June 30, 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 June 30, 2019, our results of operations for the three and six months ended June 30, 2018 and 2019, and our cash flows for the six months ended June 30, 2018 and 2019. The results of operations for the three and six months ended June 30, 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 implementing 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.
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 upon adoption. 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 7 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 | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2019 | | 2018 | | 2019 |
Google properties | $ | 23,262 |
| | $ | 27,335 |
| | $ | 45,260 |
| | $ | 53,017 |
|
Google Network Members' properties | 4,825 |
| | 5,266 |
| | 9,469 |
| | 10,304 |
|
Google advertising revenues | 28,087 |
| | 32,601 |
| | 54,729 |
| | 63,321 |
|
Google other revenues | 4,425 |
| | 6,181 |
| | 8,779 |
| | 11,630 |
|
Other Bets revenues | 145 |
| | 162 |
| | 295 |
| | 332 |
|
Total revenues(1) | $ | 32,657 |
| | $ | 38,944 |
| | $ | 63,803 |
| | $ | 75,283 |
|
| |
(1) | Revenues include hedging gains (losses) of $(103) million and $108 million for the three months ended June 30, 2018 and 2019, respectively, and $(342) million and $245 million for the six months ended June 30, 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 | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2019 | | 2018 | | 2019 |
United States | $ | 14,933 |
| | 46 | % | | $ | 17,863 |
| | 46 | % | | $ | 29,077 |
| | 46 | % | | $ | 34,395 |
| | 46 | % |
EMEA(1) | 10,785 |
| | 33 |
| | 12,401 |
| | 32 |
| | 21,259 |
| | 33 |
| | 24,192 |
| | 32 | % |
APAC(1) | 5,090 |
| | 15 |
| | 6,551 |
| | 17 |
| | 9,894 |
| | 15 |
| | 12,663 |
| | 17 | % |
Other Americas(1) | 1,849 |
| | 6 |
| | 2,129 |
| | 5 |
| | 3,573 |
| | 6 |
| | 4,033 |
| | 5 | % |
Total revenues(2) | $ | 32,657 |
| | 100 | % | | $ | 38,944 |
| | 100 | % | | $ | 63,803 |
| | 100 | % | | $ | 75,283 |
| | 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 and six months ended June 30, 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 six months ended June 30, 2019
was primarily driven by the recognition of $1.3 billion of revenues that were included in the deferred revenue 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 June 30, 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 June 30, 2019 |
| Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Marketable Securities |
| (unaudited) |
Level 2: | | | | | | | | | | | |
Time deposits(1) | $ | 3,469 |
| | $ | 0 |
| | $ | 0 |
| | $ | 3,469 |
| | $ | 3,469 |
| | $ | 0 |
|
Government bonds | 54,182 |
| | 456 |
| | (67 | ) | | 54,571 |
| | 684 |
| | 53,887 |
|
Corporate debt securities | 26,020 |
| | 266 |
| | (23 | ) | | 26,263 |
| | 7 |
| | 26,256 |
|
Mortgage-backed and asset-backed securities | 17,171 |
| | 95 |
| | (67 | ) | | 17,199 |
| | 0 |
| | 17,199 |
|
Total | $ | 100,842 |
| | $ | 817 |
| | $ | (157 | ) | | $ | 101,502 |
| | $ | 4,160 |
| | $ | 97,342 |
|
| |
(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 $37 million and $119 million for the three months ended June 30, 2018 and 2019, respectively, and $39 million and $165 million, for the six months ended June 30, 2018 and 2019, respectively. We recognized gross realized losses of $31 million and $21 million for the three months ended June 30, 2018 and 2019, respectively and $72 million and $69 million for the six months ended June 30, 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 June 30, 2019 |
Due in 1 year | $ | 22,862 |
|
Due in 1 year through 5 years | 59,518 |
|
Due in 5 years through 10 years | 4,773 |
|
Due after 10 years | 10,189 |
|
Total | $ | 97,342 |
|
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 June 30, 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 |