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 March 31, 2021

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)

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 April 20, 2021, there were 300,746,844 shares of Alphabet’s Class A common stock outstanding, 45,836,948 shares of Alphabet's Class B common stock outstanding, and 323,580,001 shares of Alphabet's Class C capital stock outstanding.

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Alphabet Inc.

Form 10-Q

For the Quarterly Period Ended March 31, 2021

TABLE OF CONTENTS

		Page No.
Note About Forward-Looking Statements		1
PART I. FINANCIAL INFORMATION
Item 1	Financial Statements	3
	Consolidated Balance Sheets - December 31, 2020 and March 31, 2021	3
	Consolidated Statements of Income - Three Months Ended March 31, 2020 and 2021	4
	Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2020 and 2021	5
	Consolidated Statements of Stockholders' Equity - Three Months Ended March 31, 2020 and 2021	6
	Consolidated Statements of Cash Flows - Three Months Ended March 31, 2020 and 2021	7
	Notes to Consolidated Financial Statements	8
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	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 ongoing effect of the novel coronavirus pandemic ("COVID-19"), including its macroeconomic effects on our business, operations, and financial results; and the effect of governmental lockdowns, restrictions and new regulations on our operations and processes;

•the growth of our business and revenues and our expectations about the factors that influence our success and trends in our business, including the size and timing of the expected return on our continuing investments in our Google Cloud segment;

•fluctuations in our revenue growth rate and operating margin and various factors contributing to such fluctuations;

•our expectation that the shift from an offline to online world will continue to benefit our business;

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

•our expectation that our traffic acquisition costs ("TAC") and the associated TAC rate will fluctuate, which could affect our overall margins;

•our expectation that our monetization trends will fluctuate, which could affect our revenues and margins;

•fluctuations in our revenue growth, as well as the change in paid clicks and cost-per-click and the change in impressions and cost-per-impression, and various factors contributing to such fluctuations;

•our expectation that we will continue to periodically review, refine, and update our methodologies for monitoring, gathering, and counting the number of paid clicks and impressions;

•our expectation that our results will be affected by our performance in international markets as users in developing economies increasingly come online;

•our expectation that our foreign exchange risk management program will not fully offset our net exposure to fluctuations in foreign currency exchange rates;

•the expected variability of gains and losses related to hedging activities under our foreign exchange risk management program;

•the amount and timing of revenue recognition from customer contracts with commitments for performance obligations, including our estimate of the remaining amount of commitments and when we expect to recognize revenue;

•fluctuations in our capital expenditures;

•our plans to continue to invest in new businesses, products, services and technologies, systems, land and buildings for data centers and offices, and infrastructure, as well as to continue to invest in acquisitions;

•our pace of hiring and our plans to provide competitive compensation programs;

•our expectation that our cost of revenues, research and development ("R&D") expenses, sales and marketing expenses, and general and administrative expenses may increase in amount and/or may increase as a percentage of revenues and may be affected by a number of factors;

•estimates of our future compensation expenses;

•our expectation that our other income (expense), net ("OI&E"), will fluctuate in the future, as it is largely driven by market dynamics;

•fluctuations in our effective tax rate;

•seasonal fluctuations in internet usage and advertiser expenditures, underlying business trends such as traditional retail seasonality (including developments and volatility arising from COVID-19), which are likely to cause fluctuations in our quarterly results;

•the sufficiency of our sources of funding;

•our potential exposure in connection with new and pending investigations, proceedings, and other contingencies;

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•the sufficiency and timing of our proposed remedies in response to decisions from the European Commission ("EC") and other regulators and governmental entities;

•our expectations regarding the timing, design and implementation of our new global enterprise resource planning ("ERP") system;

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

•our long-term sustainability and diversity goals;

•our expectation that the change in the estimated useful life of servers and certain network equipment will have a favorable, yet declining, effect on our 2021 operating results;

as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may appear throughout this report and other documents we file with the Securities and Exchange Commission ("SEC"), including without limitation, the following sections: Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, 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, 2020, and those discussed in other documents we file with the SEC. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

As used herein, "Alphabet," "the company," "we," "us," "our," and similar terms include Alphabet Inc. and its subsidiaries, unless the context indicates otherwise.

"Alphabet," "Google," and other trademarks of ours appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies' trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

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PART I.    FINANCIAL 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, 2020		As of March 31, 2021
			(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	26,465	$	26,622
Marketable securities	110,229		108,482
Total cash, cash equivalents, and marketable securities	136,694		135,104
Accounts receivable, net	30,930		28,006
Income taxes receivable, net	454		493
Inventory	728		888
Other current assets	5,490		7,646
Total current assets	174,296		172,137
Non-marketable investments	20,703		25,294
Deferred income taxes	1,084		1,129
Property and equipment, net	84,749		87,606
Operating lease assets	12,211		12,598
Intangible assets, net	1,445		1,823
Goodwill	21,175		22,341
Other non-current assets	3,953		4,167
Total assets	$	319,616	$	327,095
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	5,589	$	4,801
Accrued compensation and benefits	11,086		8,375
Accrued expenses and other current liabilities	28,631		30,732
Accrued revenue share	7,500		6,962
Deferred revenue	2,543		2,690
Income taxes payable, net	1,485		1,893
Total current liabilities	56,834		55,453
Long-term debt	13,932		13,887
Deferred revenue, non-current	481		530
Income taxes payable, non-current	8,849		9,278
Deferred income taxes	3,561		4,406
Operating lease liabilities	11,146		11,382
Other long-term liabilities	2,269		2,146
Total liabilities	97,072		97,082
Contingencies (Note 9)
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); 675,222 (Class A 300,730, Class B 45,843, Class C 328,649) and 671,094 (Class A 300,747, Class B 45,836, Class C 324,511) shares issued and outstanding	58,510		59,436
Accumulated other comprehensive income (loss)	633		(3)
Retained earnings	163,401		170,580
Total stockholders’ equity	222,544		230,013
Total liabilities and stockholders’ equity	$	319,616	$	327,095

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,
	2020		2021
Revenues	$	41,159	$	55,314
Costs and expenses:
Cost of revenues	18,982		24,103
Research and development	6,820		7,485
Sales and marketing	4,500		4,516
General and administrative	2,880		2,773
Total costs and expenses	33,182		38,877
Income from operations	7,977		16,437
Other income (expense), net	(220)		4,846
Income before income taxes	7,757		21,283
Provision for income taxes	921		3,353
Net income	$	6,836	$	17,930
Basic net income per share of Class A and B common stock and Class C capital stock	$	9.96	$	26.63
Diluted net income per share of Class A and B common stock and Class C capital stock	$	9.87	$	26.29

See accompanying notes.

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Alphabet Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions; unaudited)

	Three Months Ended
	March 31,
	2020		2021
Net income	$	6,836	$	17,930
Other comprehensive income (loss):
Change in foreign currency translation adjustment	(550)		(423)
Available-for-sale investments:
Change in net unrealized gains (losses)	498		(488)
Less: reclassification adjustment for net (gains) losses included in net income	(169)		11
Net change, net of income tax benefit (expense) of $(81) and $135	329		(477)
Cash flow hedges:
Change in net unrealized gains (losses)	378		179
Less: reclassification adjustment for net (gains) losses included in net income	(22)		85
Net change, net of income tax benefit (expense) of $(81) and $(50)	356		264
Other comprehensive income (loss)	135		(636)
Comprehensive income	$	6,971	$	17,294

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, 2020
	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, 2019	688,335	$	50,552	$	(1,232)	$	152,122	$	201,442
Common and capital stock issued	2,125	106		0		0		106
Stock-based compensation expense	0	3,222		0		0		3,222
Tax withholding related to vesting of restricted stock units and other	0	(1,179)		0		0		(1,179)
Repurchases of capital stock	(6,488)	(606)		0		(7,890)		(8,496)
Sale of interest in consolidated entities	0	1,593		0		0		1,593
Net income	0	0		0		6,836		6,836
Other comprehensive income (loss)	0	0		135		0		135
Balance as of March 31, 2020	683,972	$	53,688	$	(1,097)	$	151,068	$	203,659

	Three Months Ended March 31, 2021
	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, 2020	675,222	$	58,510	$	633	$	163,401	$	222,544
Common and capital stock issued	1,569	6		0		0		6
Stock-based compensation expense	0	3,788		0		0		3,788
Tax withholding related to vesting of restricted stock units and other	0	(2,234)		0		0		(2,234)
Repurchases of capital stock	(5,697)	(644)		0		(10,751)		(11,395)
Sale of interest in consolidated entities	0	10		0		0		10
Net income	0	0		0		17,930		17,930
Other comprehensive income (loss)	0	0		(636)		0		(636)
Balance as of March 31, 2021	671,094	$	59,436	$	(3)	$	170,580	$	230,013

See accompanying notes.

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Alphabet Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions; unaudited)

	Three Months Ended
	March 31,
	2020		2021
Operating activities
Net income	$	6,836	$	17,930
Adjustments:
Depreciation and impairment of property and equipment	2,899		2,525
Amortization and impairment of intangible assets	209		228
Stock-based compensation expense	3,191		3,745
Deferred income taxes	175		1,100
(Gain) loss on debt and equity securities, net	802		(4,751)
Other	297		(255)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable	2,602		2,794
Income taxes, net	(245)		785
Other assets	(115)		7
Accounts payable	(835)		(982)
Accrued expenses and other liabilities	(3,531)		(3,530)
Accrued revenue share	(871)		(444)
Deferred revenue	37		137
Net cash provided by operating activities	11,451		19,289
Investing activities
Purchases of property and equipment	(6,005)		(5,942)
Purchases of marketable securities	(37,563)		(36,426)
Maturities and sales of marketable securities	41,811		39,248
Purchases of non-marketable investments	(572)		(646)
Maturities and sales of non-marketable investments	260		19
Acquisitions, net of cash acquired, and purchases of intangible assets	(190)		(1,666)
Other investing activities	412		30
Net cash used in investing activities	(1,847)		(5,383)
Financing activities
Net payments related to stock-based award activities	(1,241)		(2,184)
Repurchases of capital stock	(8,496)		(11,395)
Proceeds from issuance of debt, net of costs	1,898		900
Repayments of debt	(1,947)		(937)
Proceeds from sale of interest in consolidated entities, net	1,600		10
Net cash used in financing activities	(8,186)		(13,606)
Effect of exchange rate changes on cash and cash equivalents	(272)		(143)
Net increase in cash and cash equivalents	1,146		157
Cash and cash equivalents at beginning of period	18,498		26,465
Cash and cash equivalents at end of period	$	19,644	$	26,622

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 became the successor issuer to Google.

We generate revenues by delivering relevant, cost-effective online advertising, cloud-based solutions that provide customers with platforms, collaboration tools and services, and sales of other products and services, such as apps and in-app purchases, digital content and subscriptions for digital content, and hardware.

Basis of Consolidation

The consolidated financial statements of Alphabet include the accounts of Alphabet and entities consolidated under the variable interest and voting models. All intercompany balances and transactions have been eliminated.

Unaudited Interim Financial Information

The Consolidated Balance Sheet as of March 31, 2021, the Consolidated Statements of Income for the three months ended March 31, 2020 and 2021, the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2021, the Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2020 and 2021 and the Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2021 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, 2021, our results of operations for the three months ended March 31, 2020 and 2021, and our cash flows for the three months ended March 31, 2020 and 2021. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021.

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, 2020 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 the allowance for credit losses, 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.

The allowance for credit losses on accounts receivable was $789 million and $719 million as of December 31, 2020 and March 31, 2021, respectively.

Change in Accounting Estimate

In January 2021, we completed an assessment of the useful lives of our servers and network equipment and adjusted the estimated useful life of our servers from three years to four years and the estimated useful life of certain network equipment from three years to five years. This change in accounting estimate was effective beginning in fiscal year 2021. Based on the carrying value of servers and certain network equipment as of December 31, 2020, and those acquired during the quarter ended March 31, 2021, the effect of this change in estimate was a reduction in depreciation expense of $835 million and an increase in net income of $650 million, or $0.97 per basic and $0.95 per diluted share, for the three months ended March 31, 2021.

Prior Period Reclassifications

Certain amounts in prior periods have been reclassified to conform with current period presentation.

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Note 2. Revenues

Revenue Recognition

The following table presents our revenues disaggregated by type (in millions).

	Three Months Ended
	March 31,
	2020		2021
Google Search & other	$	24,502	$	31,879
YouTube ads	4,038		6,005
Google Network	5,223		6,800
Google advertising	33,763		44,684
Google other	4,435		6,494
Google Services total	38,198		51,178
Google Cloud	2,777		4,047
Other Bets	135		198
Hedging gains (losses)	49		(109)
Total revenues	$	41,159	$	55,314

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

	Three Months Ended
	March 31,
	2020				2021
United States	$	18,870	46	%	$	25,032	45	%
EMEA(1)	12,845		31		17,031		31
APAC(1)	7,238		18		10,455		19
Other Americas(1)	2,157		5		2,905		5
Hedging gains (losses)	49		0		(109)		0
Total revenues	$	41,159	100	%	$	55,314	100	%

(1)    Regions represent Europe, the Middle East, and Africa ("EMEA"); Asia-Pacific ("APAC"); and Canada and Latin America ("Other Americas").

Deferred Revenues and Remaining Performance Obligations

We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. Deferred revenues primarily relate to Google Cloud and Google other. Our total deferred revenue as of December 31, 2020 was $3.0 billion, of which $1.3 billion was recognized as revenues during the quarter ended March 31, 2021.

Additionally, we have performance obligations associated with commitments in customer contracts, primarily related to Google Cloud, for future services that have not yet been recognized as revenues, also referred to as remaining performance obligations. Remaining performance obligations include related deferred revenue currently recorded as well as amounts that will be invoiced in future periods, and excludes (i) contracts with an original expected term of one year or less, (ii) cancellable contracts, and (iii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. As of March 31, 2021, the amount not yet recognized as revenues from these commitments was $30.7 billion. We expect to recognize approximately half over the next 24 months with the remaining thereafter. However, the amount and timing of revenue recognition is largely driven by when the customer utilizes the services and our ability to deliver in accordance with relevant contract terms, which could affect our estimate of the remaining performance obligations and when we expect to recognize such as revenues.

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Note 3. Financial Instruments

Debt Securities

We classify our marketable debt securities, which are accounted for as available-for-sale, 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.

For certain marketable debt securities, we have elected the fair value option for which changes in fair value are recorded in other income (expense), net. The fair value option was elected for these securities to align with the unrealized gains and losses from related derivative contracts. Unrealized net gains related to debt securities still held where we have elected the fair value option were $87 million and $30 million as of December 31, 2020 and March 31, 2021, respectively. As of December 31, 2020 and March 31, 2021, the fair value of these debt securities was $2.0 billion for both periods.

The following tables summarize our debt securities, for which we did not elect the fair value option, by significant investment categories (in millions):

	As of December 31, 2020
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cash and Cash Equivalents		Marketable Securities
Level 2:
Time deposits(1)	$	3,564	$	0	$	0	$	3,564	$	3,564	$	0
Government bonds	55,156		793		(9)		55,940		2,527		53,413
Corporate debt securities	31,521		704		(2)		32,223		8		32,215
Mortgage-backed and asset-backed securities	16,767		364		(7)		17,124		0		17,124
Total	$	107,008	$	1,861	$	(18)	$	108,851	$	6,099	$	102,752

	As of March 31, 2021
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Cash and Cash Equivalents		Marketable Securities
Level 2:
Time deposits(1)	$	3,388	$	0	$	0	$	3,388	$	3,388	$	0
Government bonds	50,757		607		(51)		51,313		1,941		49,372
Corporate debt securities	32,702		486		(84)		33,104		1		33,103
Mortgage-backed and asset-backed securities	18,229		265		(49)		18,445		0		18,445
Total	$	105,076	$	1,358	$	(184)	$	106,250	$	5,330	$	100,920

(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 $257 million and $135 million for the three months ended March 31, 2020 and 2021, respectively. We recognized gross realized losses of $39 million and $136 million for the three months ended March 31, 2020 and 2021, respectively. We reflect these gains and losses as a component of other income (expense), net.

The following table summarizes the estimated fair value of our investments in marketable debt securities by stated contractual maturity dates (in millions):

	As of March 31, 2021
Due in 1 year or less	$	20,220
Due in 1 year through 5 years	65,995
Due in 5 years through 10 years	2,829
Due after 10 years	13,891
Total	$	102,935

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The following tables present fair values and gross unrealized losses recorded to AOCI, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions):

	As of December 31, 2020
	Less than 12 Months				12 Months or Greater				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Government bonds	$	5,516	$	(9)	$	3	$	0	$	5,519	$	(9)
Corporate debt securities	1,999		(1)		0		0		1,999		(1)
Mortgage-backed and asset-backed securities	929		(5)		242		(2)		1,171		(7)
Total	$	8,444	$	(15)	$	245	$	(2)	$	8,689	$	(17)

	As of March 31, 2021
	Less than 12 Months				12 Months or Greater				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Government bonds	$	14,139	$	(51)	$	0	$	0	$	14,139	$	(51)
Corporate debt securities	11,443		(54)		0		0		11,443		(54)
Mortgage-backed and asset-backed securities	5,897		(48)		154		(1)		6,051		(49)
Total	$	31,479	$	(153)	$	154	$	(1)	$	31,633	$	(154)

During the three months ended March 31, 2020 and 2021, we did not recognize any significant credit losses and the ending allowance balances for credit losses were immaterial as of December 31, 2020 and March 31, 2021. See Note 6 for further details on other income (expense), net.

Equity Investments

The following discusses our marketable equity securities, non-marketable equity securities, gains and losses on marketable and non-marketable equity securities, as well as our equity securities accounted for under the equity method.

Our marketable equity securities are publicly traded stocks or funds measured at fair value and classified within Level 1 and 2 in the fair value hierarchy because we use quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar instruments in active markets.

Our non-marketable equity securities are investments in privately held companies without readily determinable market values. The carrying value of our non-marketable equity securities is adjusted to fair value upon observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). Non-marketable equity securities that have been remeasured during the period based on observable transactions are classified within Level 2 or Level 3 in the fair value hierarchy because we estimate the value based on valuation methods which may include a combination of the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the securities we hold. The fair value of non-marketable equity securities that have been remeasured due to impairment are classified within Level 3.

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Gains and losses on marketable and non-marketable equity securities

Gains and losses reflected in other income (expense), net, for our marketable and non-marketable equity securities are summarized below (in millions):

	Three Months Ended
	March 31,
	2020		2021
Net gain (loss) on equity securities sold during the period	$	171	$	201
Net unrealized gain (loss) on equity securities held as of the end of the period	(985)		4,636
Total gain (loss) recognized in other income (expense), net	$	(814)	$	4,837

In the table above, net gain (loss) on equity securities sold during the period reflects the difference between the sale proceeds and the carrying value of the equity securities at the beginning of the period or the purchase date, if later. 

Cumulative net gains (losses) on equity securities sold during the period, which is summarized in the following table (in millions), represents the total net gains (losses) recognized after the initial purchase date of the equity security. While these net gains may have been reflected in periods prior to the period of sale, we believe they are important supplemental information as they reflect the economic realized net gains on the securities sold during the period. Cumulative net gains are calculated as the difference between the sale price and the initial purchase price for the equity security sold during the period.

	Equity Securities Sold
	Three Months Ended
	March 31,
	2020		2021
Total sale price	$	909	$	725
Total initial cost	261		357
Cumulative net gains	$	648	$	368

Carrying value of marketable and non-marketable equity securities

The carrying value is measured as the total initial cost plus the cumulative net gain (loss). The carrying values for our marketable and non-marketable equity securities are summarized below (in millions):

	As of December 31, 2020
	Marketable Securities		Non-Marketable Securities		Total
Total initial cost	$	2,227	$	14,616	$	16,843
Cumulative net gain (loss)(1)	3,631		4,277		7,908
Carrying value(2)	$	5,858	$	18,893	$	24,751

(1)Non-marketable equity securities cumulative net gain (loss) is comprised of $6.1 billion unrealized gains and $1.9 billion unrealized losses (including impairment).

(2)The long-term portion of marketable equity securities of $429 million is included within other non-current assets.

	As of March 31, 2021
	Marketable Securities(2)		Non-Marketable Securities		Total
Total initial cost	$	2,421	$	14,485	$	16,906
Cumulative net gain(1)	3,589		8,795		12,384
Carrying value(2)	$	6,010	$	23,280	$	29,290

(1)Non-marketable equity securities cumulative net gain is comprised of $10.6 billion unrealized gains and $1.8 billion unrealized losses (including impairment).

(2)The long-term portion of marketable equity securities of $463 million is included within other non-current assets.

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Marketable equity securities

The following table summarizes marketable equity securities measured at fair value by significant investment categories (in millions):

	As of December 31, 2020				As of March 31, 2021
	Cash and Cash Equivalents		Marketable Securities		Cash and Cash Equivalents		Marketable Securities
Level 1:
Money market funds	$	12,210	$	0	$	13,679	$	0
Marketable equity securities(1)(2)	0		5,470		0		5,670
	12,210		5,470		13,679		5,670
Level 2:
Mutual funds	0		388		0		340
Total	$	12,210	$	5,858	$	13,679	$	6,010

(1)The balance as of December 31, 2020 and March 31, 2021 includes investments that were reclassified from non-marketable equity securities following the commencement of public market trading of the issuers or acquisition by public entities (certain of which are subject to short-term lock-up restrictions).

(2)As of December 31, 2020 and March 31, 2021 the long-term portion of marketable equity securities of $429 million and $463 million, respectively, is included within other non-current assets.

Non-marketable equity securities

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):

	Three Months Ended
	March 31,
	2020		2021
Unrealized gains	$	356	$	4,678
Unrealized losses (including impairment)	(1,304)		(2)
Total unrealized gain (loss) for non-marketable equity securities	$	(948)	$	4,676

During the three months ended March 31, 2021, included in the $23.3 billion of non-marketable equity securities, $10.3 billion were measured at fair value primarily based on observable market transactions, resulting in a net unrealized gain of $4.7 billion.

Equity securities accounted for under the Equity Method

As of December 31, 2020 and March 31, 2021, equity securities accounted for under the equity method had a carrying value of approximately $1.4 billion and $1.6 billion, respectively. Our share of gains and losses including impairment are included as a component of other income (expense), net, in the Consolidated Statements of Income. See Note 6 for further details on other income (expense), net.

Derivative Financial Instruments

We enter into derivative instruments to manage risks relating to our ongoing business operations. The primary risk managed with derivative instruments is foreign exchange risk. We use foreign currency contracts to reduce the risk that our cash flows, earnings, and investment in foreign subsidiaries will be adversely affected by foreign currency exchange rate fluctuations. We also enter into derivative instruments to partially offset our exposure to other risks and enhance investment returns.

We recognize derivative instruments as either assets or liabilities in the Consolidated Balance Sheets at fair value and classify the derivatives primarily within Level 2 in the fair value hierarchy. We present our collar contracts (an option strategy comprised of a combination of purchased and written options) at net fair values where both the purchased and written options are with the same counterparty. For other derivative contracts, we present at gross fair values. We primarily record changes in the fair value in the Consolidated Statements of Income as either other income (expense), net, or revenues, or in the Consolidated Balance Sheets in AOCI, as discussed below.

We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. Further, we enter into collateral security arrangements that provide for collateral to be received or pledged when the net fair value of certain financial instruments fluctuates from

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contractually established thresholds. Cash collateral received related to derivative instruments under our collateral security arrangements are included in other current assets with a corresponding liability. Cash and non-cash collateral pledged related to derivative instruments under our collateral security arrangements are included in other current assets.

Cash Flow Hedges

We designate foreign currency forward and option contracts (including collars) as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the U.S. dollar. These contracts have maturities of 24 months or less.

Cash flow hedge amounts included in the assessment of hedge effectiveness are deferred in AOCI and subsequently reclassified to revenue when the hedged item is recognized in earnings. We exclude the change in forward points and time value from our assessment of hedge effectiveness. The initial value of the excluded component is amortized on a straight-line basis over the life of the hedging instrument and recognized in revenues. The difference between fair value changes of the excluded component and the amount amortized to revenues is recorded in AOCI. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI are reclassified to other income (expense), net in the period of de-designation.

As of March 31, 2021, the net accumulated gain on our foreign currency cash flow hedges before tax effect was $143 million, which is expected to be reclassified from AOCI into earnings within the next 12 months.

Fair Value Hedges

We designate foreign currency forward contracts as fair value hedges to hedge foreign currency risks for our investments denominated in currencies other than the U.S. dollar. Fair value hedge amounts included in the assessment of hedge effectiveness are recognized in other income (expense), net, along with the offsetting gains and losses of the related hedged items. We exclude changes in forward points from the assessment of hedge effectiveness and recognize changes in the excluded component in other income (expense), net.

Net Investment Hedges

We designate foreign currency forward contracts as net investment hedges to hedge the foreign currency risks related to our investment in foreign subsidiaries. Net investment hedge amounts included in the assessment of hedge effectiveness are recognized in AOCI along with the foreign currency translation adjustment. We exclude changes in forward points from the assessment of hedge effectiveness and recognize changes in the excluded component in other income (expense), net.

Other Derivatives

Other derivatives not designated as hedging instruments consist primarily of foreign currency forward contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the functional currency of a subsidiary. Gains and losses on these contracts, as well as the related costs, are recognized in other income (expense), net, along with the foreign currency gains and losses on monetary assets and liabilities.

We also use derivatives not designated as hedging instruments to manage risks relating to interest rates, commodity prices, credit exposures and to enhance investment returns. Additionally, from time to time, we enter into derivatives to hedge the market price risk on certain of our marketable equity securities. Gains (losses) arising from these derivatives are reflected within the "other" component of other income (expense), net and the offsetting recognized gains (losses) on the marketable equity securities are reflected within the gain (loss) on equity securities, net component of other income (expense), net. See Note 6 for further details on other income (expense), net.

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The gross notional amounts of our outstanding derivative instruments were as follows (in millions):

	As of December 31, 2020		As of March 31, 2021
Derivatives Designated as Hedging Instruments:
Foreign exchange contracts
Cash flow hedges	$	10,187	$	13,824
Fair value hedges	$	1,569	$	2,548
Net investment hedges	$	9,965	$	12,473
Derivatives Not Designated as Hedging Instruments:
Foreign exchange contracts	$	39,861	$	40,326
Other contracts	$	2,399	$	2,931

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

		As of December 31, 2020
	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	$	33	$	316	$	349
Other contracts	Other current and non-current assets	0		16		16
Total		$	33	$	332	$	365
Derivative Liabilities:
Level 2:
Foreign exchange contracts	Accrued expenses and other liabilities, current and non-current	$	395	$	185	$	580
Other contracts	Accrued expenses and other liabilities, current and non-current	0		942		942
Total		$	395	$	1,127	$	1,522

		As of March 31, 2021
	Balance Sheet Location	Fair Value of Derivatives Designated as Hedging Instruments		Fair Value of Derivatives Not Designated as Hedging Instruments		Total Fair Value
Derivative Assets:
Level 2:
Foreign exchange contracts	Other current and non-current assets	$	482	$	162	$	644
Other contracts	Other current and non-current assets	0		27		27
Total		$	482	$	189	$	671
Derivative Liabilities:
Level 2:
Foreign exchange contracts	Accrued expenses and other liabilities, current and non-current	$	57	$	268	$	325
Other contracts	Accrued expenses and other liabilities, current and non-current	0		654		654
Total		$	57	$	922	$	979

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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):

	Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect
	Three Months Ended
	March 31,
	2020		2021
Derivatives in Cash Flow Hedging Relationship:
Foreign exchange contracts
Amount included in the assessment of effectiveness	$	412	$	162
Amount excluded from the assessment of effectiveness	52		49
Derivatives in Net Investment Hedging Relationship:
Foreign exchange contracts
Amount included in the assessment of effectiveness	80		378
Total	$	544	$	589

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

	Gains (Losses) Recognized in Income
	Three Months Ended
	March 31,
	2020				2021
	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	$	41,159	$	(220)	$	55,314	$