2016 Annual Report - Alphabet Inc.

2016

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Founders' Letter Larry Page, CEO, Alphabet

A is for Alphabet

Hard to believe we are about a quarter short of two years of announcing Alphabet. It's been busy! I certainly feel Alphabet is working well, and as intended (see the original "G is for Google" announcement). At the time, I wrote that "Alphabet is about businesses prospering through strong leaders and independence." The new structure has helped entrepreneurs build and run companies with the autonomy and speed they need.

Sergey and I are working well together on the overall Alphabet direction and providing guidance to the companies. Sundar is doing great as Google CEO. It's certainly a big job and we are very lucky to have him. He'll probably write this letter again in the future as he has in the past, so I won't speak too much for him on the Google related topics in this one. But, I'm excited about how he is leading the company with a focus on machine learning and AI. We took a big step in that direction with the Google Assistant, and built it into a new family of hardware devices like the Pixel and Google Home. There's a lot more to come.

We've had a number of significant things happen on the Alphabet side since I last wrote. A number of our projects became companies, with more autonomy and dedicated leadership.

Waymo is the new self-driving car company formed from Project Chauffeur at X. John Krafcik is the new CEO and brings significant auto industry experience. I love the name and I love even more the excitement you can see when you visit with them! They also formed a partnership with Fiat Chrysler around their new plug-in hybrid Pacifica minivan which I see driving around the Waymo offices with lots of sensors on it. I can't wait until Waymo launches.

Verily Life Sciences launched in December 2015 with Andy Conrad as founding CEO, also coming out of X. They have launched myriad efforts and raised $800M from Temasek, who joined their board and will help with Asian expansion. I'm very fond of their Debug project, which aims to stop mosquitoes in their tracks. It has been running for a while, showing some good foresight because it was started before Zika became a big concern.

In June 2016, Marwan Fawaz became CEO of Nest. He has been doing great against their plan, and we have really been enjoying working with him! I recommend you buy all their excellent products including indoor and outdoor cameras, learning thermostats, and smoke alarms.

Very recently Greg McCray started as CEO of Google Fiber. I've been enjoying working with him and his team and he has rapidly been getting up to speed. He visited all of our Fiber cities so quickly that I think he was still a bit out of breath when he got back to Mountain View! We have made significant investments in bringing gigabit fiber internet to lots of happy customers and I'm excited about our opportunities to do it better.

We have many other efforts within Alphabet. Calico CEO Art Levinson, former CEO of Genentech, is building an amazing research and development company focused on aging. We also have newly branded investment arms, GV (formerly Google Ventures), and CapitalG (formerly Google Capital) which are doing well. Sergey is continuing to spend time working with the X moonshot factory. They have a number of efforts like Wing, which is doing drone delivery. I also can't wait for them to launch!

With the change to Alphabet, oversight has been easier because of increased visibility. We have streamlined efforts where it made sense and in other areas we have seen places to double down. I also think we have learned a lot about how to set up new companies with a structure for success. Our recent launch of Waymo was a great example of our learnings. In general we are taking a patient approach to investing our capital, especially significant uses. We're not going to invest if we don't see great opportunities and we feel like our track record for picking some important efforts long before others is pretty good. Machine learning and all the efforts around Google Brain and Deep Mind are good examples. Google Cloud led by Diane Greene is doing a fabulous job of getting our machine learning hardware and software out to everyone. We were early in machine learning and are already seeing significant dividends coming out. Many of the Alphabet companies are already using this technology and are planning to use it even more.

So in conclusion, Sergey and I are having a good time looking for new opportunities and managing and scaling our existing efforts. I still see amazing opportunities that just aren't quite fully developed yet--and helping making them real is what I get excited about.

Larry Page, CEO, Alphabet

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________.

(State or other jurisdiction of incorporation or organization)

Exact Name of Registrant as specified in its Charter, Address of Principal Executive Offices, Zip Code and Registrant's telephone number, including area code

ALPHABET INC.

Commission IRS Employer File Number Identification No.

Delaware

1600 Amphitheatre Parkway Mountain View, CA 94043 (650) 253-0000

001-37580

61-1767919

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class

Name of each exchange on which registered

Alphabet Inc.: Class A Common Stock $0.001 par value

Nasdaq Stock Market LLC (Nasdaq Global Select Market)

Class C Capital Stock $0.001 par value

Nasdaq Stock Market LLC (Nasdaq Global Select Market)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of each class Alphabet Inc.: None

Indicate by check mark ?? if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Alphabet Inc.

YES

NO

?? if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

?? 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.

?? 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).

?? if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (?229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

?? whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Alphabet Inc.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

(Do not check if a smaller reporting company)

?? whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

As of June 30, 2016, the aggregate market value of shares held by non-affiliates of the registrant (based upon the closing sale prices of such shares on the Nasdaq Global Select Market on June 30, 2016) was approximately $413.8 billion. For purposes of calculating the aggregate market value of shares held by non-affiliates, we have assumed that all outstanding shares are held by non-affiliates, except for shares held by each of our executive officers, directors and 5% or greater stockholders. In the case of 5% or greater stockholders, we have not deemed such stockholders to be affiliates unless there are facts and circumstances which would indicate that such stockholders exercise any control over our company, or unless they hold 10% or more of our outstanding common stock. These assumptions should not be deemed to constitute an admission that all executive officers, directors and 5% or greater stockholders are, in fact, affiliates of our company, or that there are not other persons who may be deemed to be affiliates of our company. Further information concerning shareholdings of our officers, directors and principal stockholders is included or incorporated by reference in Part III, Item 12 of this Annual Report on Form 10-K.

As of January 26, 2017, there were 297,117,506 shares of the registrant's Class A common stock outstanding, 47,369,687 shares of the registrant's Class B common stock outstanding, and 346,933,134 shares of the registrant's Class C capital stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement for the 2017 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended December 31, 2016.

Alphabet Inc. Form 10-K For the Fiscal Year Ended December 31, 2016

Table of Contents

Note About Forward-Looking Statements

ii

Part I

ITEM 1. ITEM 1A. ITEM 1B. ITEM 2. ITEM 3. ITEM 4.

1

Business 1 Risk Factors 5 Unresolved Staff Comments 16 Properties 16 Legal Proceedings 16 Mine Safety Disclosures 16

Part II

ITEM 5.

ITEM 6. ITEM 7. ITEM 7A. ITEM 8. ITEM 9. ITEM 9A. ITEM 9B.

17

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 17 Selected Financial Data 19 Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Quantitative and Qualitative Disclosures About Market Risk 35 Financial Statements and Supplementary Data 37 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 76 Controls and Procedures 76 Other Information 76

Part III

ITEM 10. ITEM 11. ITEM 12.

ITEM 13. ITEM 14.

77

Directors, Executive Officers and Corporate Governance 77 Executive Compensation 77 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 77 Certain Relationships and Related Transactions, and Director Independence 77 Principal Accountant Fees and Services 77

Part IV ITEM 15.

78 Exhibits, Financial Statement Schedules 78

ALPHABET INC. | Annual Report i

Note About Forward-Looking Statements

This Annual Report on Form 10-K 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;

?? our expectation related to our renewable energy efforts;

?? the potential for declines in our revenue growth rate;

?? our expectation that we will continue to take steps to improve the relevance of the ads we deliver and to reduce the number of accidental clicks;

?? fluctuations in the rate of change in revenue and revenue growth, as well as the rate of change in paid clicks and average costper-click and various factors contributing to such fluctuations;

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

?? the expected variability of costs related to hedging activities under our foreign exchange risk management program;

?? our expectation that our cost of revenues, research and development expenses, sales and marketing expenses, and general and administrative expenses will increase in dollars and may increase as a percentage of revenues;

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

?? our expectation that our monetization trends will fluctuate, which could affect our revenues and margins in the future;

?? our expectation that our traffic acquisition costs will increase in the future;

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

?? our expectation that the portion of our revenues that we derive from non-advertising revenues will continue to increase;

?? our expectation that our other income (loss), net, will fluctuate in the future as it is largely driven by market dynamics;

?? estimates of our future compensation expenses;

?? fluctuations in our effective tax rate;

?? the sufficiency of our sources of funding;

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

?? fluctuations in our capital expenditures;

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

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

as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forwardlooking statements may appear throughout this report, including without limitation, the following sections: Item 1 "Business," Item 1A "Risk Factors," and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements generally can be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "will be," "will continue," "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 Annual Report on Form 10-K, and in particular, the risks discussed under the caption "Risk Factors" in Item 1A of this report and those discussed in other documents we file with the Securities and Exchange Commission (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.

ii ALPHABET INC. | Annual Report

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