GOOG Q2 2018 10-Q

[Pages:55]Table of Contents

(Mark One)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________________________________________________

FORM 10-Q

________________________________________________________________________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2018 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 (State or other jurisdiction of incorporation or organization)

61-1767919 (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 No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (?232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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

Non-accelerated filer (Do not check if a smaller reporting company)

Emerging growth company

Accelerated filer Smaller reporting 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 18, 2018, there were 298,914,199 shares of Alphabet's Class A common stock outstanding, 46,880,076 shares of Alphabet's Class B common stock outstanding, and 349,883,498 shares of Alphabet's Class C capital stock outstanding.

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Alphabet Inc. Form 10-Q

For the Quarterly Period Ended June 30, 2018

TABLE OF CONTENTS

Note About Forward-Looking Statements

Alphabet Inc.

Page No.

1

PART I. FINANCIAL INFORMATION

Item 1 Financial Statements (unaudited)

3

Consolidated Balance Sheets - December 31, 2017 and June 30, 2018

3

Consolidated Statements of Income - Three and Six Months Ended June 30, 2017 and

4

2018

Consolidated Statements of Comprehensive Income - Three and Six Months Ended June

5

30, 2017 and 2018

Consolidated Statements of Cash Flows - Six Months Ended June 30, 2017 and 2018

6

Notes to Consolidated Financial Statements

7

Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations

33

Item 3 Quantitative and Qualitative Disclosures About Market Risk

47

Item 4 Controls and Procedures

47

PART II. OTHER INFORMATION

Item 1 Legal Proceedings

48

Item 1A Risk Factors

48

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 6 Exhibits

49

Signature

50

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Alphabet Inc.

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding:

? the growth of our business and revenues and our expectations about the factors that influence our success and trends in our business;

? our plans to continue to invest in new businesses, products, services and technologies, systems, facilities, and infrastructure, to continue to hire aggressively and provide competitive compensation programs, as well as to continue to invest in acquisitions;

? seasonal fluctuations in internet usage and advertiser expenditures, underlying business trends such as traditional retail seasonality, and macroeconomic conditions, which are likely to cause fluctuations in our quarterly results;

? the potential for declines in our revenue growth rate; ? our expectation that we will continue to take steps to improve the relevance of the ads we deliver and to reduce

the number of accidental clicks; ? fluctuations in 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; ? the anticipated effect of, and our response to, new accounting pronouncements; ? our expectation that our cost of revenues, research and development expenses, sales and marketing expenses, and general and administrative expenses will increase in dollars and may increase as a percentage of revenues; ? our potential exposure in connection with pending investigations, proceedings, and other contingencies; ? our expectation that our monetization trends will fluctuate, which could affect our revenues and margins in the future; ? our expectation that our traffic acquisition costs (TAC) and the associated TAC rates will increase 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, 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 effect of the U.S. Tax Cuts and Jobs Act (Tax Act); ? the sufficiency of our sources of funding; ? our payment terms to certain advertisers, which may increase our working capital requirements; ? fluctuations in our capital expenditures; ? our expectations related to the operating structure implemented pursuant to the Alphabet holding company reorganization; ? the expected timing and amount of Alphabet Inc.'s 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, 2017, 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, 2017, 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

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Alphabet Inc.

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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Alphabet Inc.

PART I.

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Alphabet Inc. CONSOLIDATED BALANCE SHEETS (in millions, except share amounts which are reflected in thousands, and par value per share amounts)

As of December 31, 2017

As of June 30, 2018

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

Marketable securities

Total cash, cash equivalents, and marketable securities

Accounts receivable, net of allowance of $674 and $630

Income taxes receivable, net

Inventory

Other current assets

Total current assets

Non-marketable investments

Deferred income taxes

Property and equipment, net

Intangible assets, net

Goodwill

Other non-current assets

Total assets

$

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$

Accrued compensation and benefits

Accrued expenses and other current liabilities

Accrued revenue share

Deferred revenue

Income taxes payable, net

Total current liabilities

Long-term debt

Deferred revenue, non-current

Income taxes payable, non-current

Deferred income taxes

Other long-term liabilities

Total liabilities

Commitments and Contingencies (Note 9)

Stockholders' equity:

Convertible preferred stock, $0.001 par value per share, 100,000 shares

authorized; no shares issued and outstanding

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);

694,783 (Class A 298,470, Class B 46,972, Class C 349,341) and

695,946 (Class A 298,895, Class B 46,891, Class C 350,160) shares

issued and outstanding

10,715 $ 91,156 101,871 18,336

369 749 2,983 124,308 7,813 680 42,383 2,692 16,747 2,672 197,295 $

3,137 $ 4,581 10,177 3,975 1,432

881 24,183

3,969 340

12,812 430

3,059 44,793

0

40,247

14,148 88,106 102,254 17,043

201 698 3,961 124,157 11,487 685 51,672 2,662 17,895 3,052 211,610

3,369 4,642 15,261 3,728 1,714 1,189 29,903 3,981

358 11,652

479 3,237 49,610

0

42,243

Accumulated other comprehensive loss Retained earnings

Total stockholders' equity Total liabilities and stockholders' equity

(992)

(1,525)

113,247

121,282

152,502

162,000

$

197,295 $

211,610

See accompanying notes.

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Alphabet Inc.

Alphabet Inc. CONSOLIDATED STATEMENTS OF INCOME (in millions, except per share amounts; unaudited)

Revenues Costs and expenses:

Cost of revenues Research and development Sales and marketing General and administrative European Commission fines Total costs and expenses Income from operations Other income (expense), net Income before income taxes Provision for income taxes Net income

Three Months Ended

Six Months Ended

June 30,

June 30,

2017

2018

2017

2018

$ 26,010 $ 32,657 $ 50,760 $ 63,803

10,373

13,883

20,168

27,350

4,172

5,114

8,114

10,153

2,897

3,780

5,541

7,384

1,700

2,002

3,501

4,037

2,736

5,071

2,736

5,071

21,878

29,850

40,060

53,995

4,132

2,807

10,700

9,808

245

1,408

496

4,950

4,377

4,215

11,196

14,758

853

1,020

2,246

2,162

$ 3,524 $ 3,195 $ 8,950 $ 12,596

Basic net income per share of Class A and B common

stock and Class C capital stock

$

Diluted net income per share of Class A and B common

stock and Class C capital stock

$

5.09 $ 5.01 $

See accompanying notes.

4.60 $ 4.54 $

12.94 $ 12.74 $

18.13 17.89

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Alphabet Inc.

Alphabet Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions; unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

2017

2018

2017

2018

Net income

$ 3,524 $ 3,195 $ 8,950 $ 12,596

Other comprehensive income (loss):

Change in foreign currency translation adjustment

565

(1,142)

1,016

(485)

Available-for-sale investments:

Change in net unrealized gains (losses)

86

(148)

225

(356)

Less: reclassification adjustment for net (gains) losses included in net income

26

(6)

51

33

Net change (net of tax effect of $0, $60, $0, and $60)

112

(154)

276

(323)

Cash flow hedges:

Change in net unrealized gains (losses)

(230)

363

(459)

101

Less: reclassification adjustment for net (gains) losses included in net income

(6)

78

(159)

272

Net change (net of tax effect of $143, $109, $292, and $97)

(236)

441

(618)

373

Other comprehensive income (loss)

441

(855)

674

(435)

Comprehensive income

$ 3,965 $ 2,340 $ 9,624 $ 12,161

See accompanying notes.

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Alphabet Inc.

Alphabet Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions; unaudited)

Operating activities Net income Adjustments:

Depreciation and impairment of property and equipment Amortization and impairment of intangible assets Stock-based compensation expense Deferred income taxes (Gain) loss on debt and equity securities, net Other Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable Income taxes, net Other assets Accounts payable Accrued expenses and other liabilities Accrued revenue share Deferred revenue

Net cash provided by operating activities Investing activities Purchases of property and equipment Proceeds from disposals of property and equipment Purchases of marketable securities Maturities and sales of marketable securities Purchases of non-marketable investments Maturities and sales of non-marketable investments Acquisitions, net of cash acquired, and purchases of intangible assets Proceeds from collection of notes receivable

Net cash used in investing activities Financing activities Net payments related to stock-based award activities Repurchases of capital stock Proceeds from issuance of debt, net of costs Repayments of debt Proceeds from sale of subsidiary shares

Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period

See accompanying notes.

Six Months Ended

June 30,

2017

2018

$ 8,950 $ 12,596

2,711 417

4,012 538 22 96

3,653 447

4,870 (157) (4,060) (120)

431 (1,779)

(454) 119 1,687

6 195 16,951

1,388 (656) (756)

(23) 4,600 (303)

295 21,774

(5,339) 54

(39,676) 34,238

(694) 118 (143) 1,419 (10,023)

(12,776) 49

(23,041) 25,523

(732) 1,191 (1,434)

0 (11,220)

(2,093)

(2,699)

(2,745)

(4,225)

0

6,236

(56)

(6,267)

480

0

(4,414)

(6,955)

279

(166)

2,793

3,433

12,918

10,715

$ 15,711 $ 14,148

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