FORM 10-K
| FORM 10-K |
| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
2015
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-50726
Google Inc.
(Exact name of registrant as specified in its charter)
| State or Other Jurisdiction of Incorporation | Exact Name of Registrant as specified in its Charter, Address of Principal Executive Offices, Zip Code and Telephone Number (Including Area Code) | Commission File Number | IRS Employer Identification No. | |||
| Delaware | ||||||
Alphabet Inc. 1600 Amphitheatre Parkway Mountain View, CA 94043 (650) 253-0000 |
| 61-1767919 | ||||
| Delaware | Google Inc. 1600 Amphitheatre Parkway Mountain View, CA 94043 (650) 253-0000 | 001-36380 | 77-0493581 | |||
1600 Amphitheatre Parkway
Mountain View, CA 94043
(Address of principal executive offices) (Zip Code)
(650) 253-0000
(Registrant’s telephone number, including area code)
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) | |
| Google Inc.: | ||
| None | ||
| Title of each class |
| Google Inc.: |
| None |
| Alphabet Inc. | Yes | ý | No | ¨ |
| Google Inc. | Yes | ¨ | No | ý |
| Alphabet Inc. | Yes | ¨ | No | ý |
| Google Inc. | Yes | ý | No | ¨ |
| Alphabet Inc. | Yes | ý | No | ¨ |
| Google Inc. | Yes | ý | No | ¨ |
| Alphabet Inc. | Yes | ý | No | ¨ |
| Google Inc. | Yes | ý | No | ¨ |
| Alphabet Inc. | ¨ | |||
| Google Inc. | ¨ | |||
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
| Alphabet Inc. | Large accelerated filer | ý | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
| Google Inc. | Large accelerated filer | ý | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
At
| Alphabet Inc. | Yes | ¨ | No | ý |
| Google Inc. | Yes | ¨ | No | ý |
At January 23, 2013,approximately $311.0 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.
2015.
| Alphabet Inc. and Google Inc. | |
("Google") and Alphabet Inc. ("Alphabet"), the successor issuer to, and parent holding company of, Google. Alphabet owns all of the equity interests in Google, and Google meets the conditions set forth in General Instruction I(1)(a), (b) and (d) of Form 10-K
and is therefore filing its information within this Form 10-K with the reduced disclosure format. Each of Alphabet and Google is filing on its own behalf the information contained in this report that relates to itself, and neither registrant makes any representation as to information relating to the other registrant. Where information or an explanation is provided that is substantially the same for each registrant, such information or explanation has been combined in this report. Where information or an explanation is not substantially the same for each registrant, separate information and explanation has been provided. In addition, separate consolidated financial statements for each registrant, along with notes to the consolidated financial statements, are included in this report. Unless indicated otherwise, throughout this Annual Report on Form 10-K, we refer to Alphabet and its consolidated subsidiaries, including Google and its consolidated subsidiaries, as "we," "us," and "our;" Alphabet Inc. and its subsidiaries as "Alphabet;" and Google Inc. and its subsidiaries as "Google."
| Alphabet Inc. and Google Inc. | |
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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 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; the potential for declines in our revenue growth rate; our expectation that growth in advertising revenues from our websites will continue to exceed that from our Google Network 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 belief that our foreign exchange risk management program will not fully offset the expected increase 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 our expectation that our traffic acquisition costs will fluctuate in the future; our continued investments in international markets; 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 following sections: Item 1 We generate General purpose search engines and information services, such as Yahoo, Microsoft's Bing, Yandex, Baidu, Naver, WebCrawler, and Vertical search engines and e-commerce websites, such as Kayak (travel queries), Alphabet Inc. and Google Inc. NOTE ABOUT FORWARD-LOOKING STATEMENTSThis 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:seasonal fluctuations in internet usage and advertiser expenditures, traditional retail seasonality and macroeconomic conditions, which are likely to cause fluctuations in our quarterly results;our plans to continue to invest in systems, facilities, and infrastructure, to increase in our hiring and provide competitive compensation programs, as well as to continue our current pace of acquisitions;Members’Members' websites, which will have a positive impact on our operating margins;our expectation that we will continue to pay most of the fees we receive from advertisers to our Google Network Members;our expectations about the impact of our acquisition of Motorola Mobility Holdings, Inc. (Motorola) on our results and business and our ability to realize the expected benefits from the acquisition and successfully implement our plans and expectations for Motorola’s business;aggregatethe rate of change in revenue and revenue growth, as well as the rate of change in paid clicks and average cost-per-click;theour net exposure to fluctuations in foreign currency exchange rates;proceedings;our expectations about our board of directors’ intention to declare a dividend of shares of the new Class C capital stock, as well as the timing of that dividend, if declared and paid;aboutrelated to the new operating structure implemented pursuant to the holding company reorganization and the associated disclosure implications;the expected timing and amount of disposition ofAlphabet Inc.'s stock repurchase;our intention to align our capital structure so that debt is held at the Home business;holding company level;as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may appear throughout this report, including without limitation, the“Business,”"Business," Item 1A “Risk"Risk Factors,”" and Item 7 “Management’s"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"anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "projects," "will be,” “will" "will continue,” “will" "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 and adversely 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”"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, “Google,” “we,” “our,”"our company," "we," "us," "our," and similar terms includerefer collectively to Alphabet Inc. and Google Inc. and its, together with their subsidiaries, unless the context indicates otherwise.“Google”"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’companies' trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.1Alphabet Inc. and Google Inc. PART IOverviewGoogleAs our founders Larry and Sergey wrote in the original founders letter, "Google is not a conventional company. We do not intend to become one." As part of that, they also explained that you could expect us to make "smaller bets in areas that might seem very speculative or even strange when compared to our current businesses." From the start, the company has always strived to do more, and to do important and meaningful things with the resources we have.To help accelerate this, we announced plans in August 2015 to create a new public holding company, called Alphabet. Alphabet is a global technology leader focused on improvingcollection of businesses -- the ways people connect with information. We aspire to buildlargest of which, of course, is Google. It also includes businesses that we combine as Other Bets and generally are pretty far afield of our main Internet products such as Verily, Calico, X, Nest, GV, Google Capital and provide services that improve the lives of billions of people globally.Access/Google Fiber. Our missionAlphabet structure is to organize the world’s informationabout helping businesses within Alphabet prosper through strong leaders and make it universally accessible and useful. Ourindependence.At Google, our innovations in web search and advertising have made our website a top internet propertywidely used and our brand one of the most recognized in the world.Our Motorola business is comprised of two operating segments. The Mobile segment is focused on mobile wireless devices and related products and services. The Home segment is focused on technologies and devices that provide video entertainment services to consumers by enabling subscribers to access a variety of interactive digital television services.revenuerevenues primarily by delivering online advertising that consumers find relevant cost-effective onlineand that advertisers find cost-effective. Google's core products such as Search, Android, Maps, Chrome, YouTube, Google Play and Gmail each have over one billion monthly active users. And we believe we are just beginning to scratch the surface. Google's vision is to remain a place of incredible creativity and innovation that uses our technical expertise to tackle big problems. Our Other Bets are also making important strides in their industries, and our goal is for them to become thriving, successful businesses in the long term.Serving Our UsersIn many ways Google search -- and the clean white page with the blinking cursor -- is a metaphor for how we think about innovation. Imagining the ways things could be -- without constraint -- is the process we use to look for better answers to some of life's everyday problems. It's about starting with the "What if?" and then working relentlessly to see if we can find the answer.It's been that way from the beginning; providing ways to access knowledge and information has been core to Google and our products have come a long way in the last decade. We used to show just ten blue links in our results. You had to click through to different websites to get your answers, which took time. Now we are increasingly able to provide direct answers -- even if you're speaking your question using Voice Search -- which makes it quicker, easier and more natural to find what you're looking for.Over time, we have added other services that let you access information quickly and easily. What if we could develop a smarter email service with plenty of storage? That's Gmail. What if we could make a simpler, speedier, safer browser? That's Chrome. What if we could provide easy access to movies, books, music and apps, no matter which device you're on? That's Google Play. What if developers could use Google's infrastructure to easily build and scale applications? And what if people could collaborate and get work done from anywhere on any device? That's cloud and apps.As devices proliferate, it's more and more important to ensure that you can navigate effortlessly across them -- that the technology gets out of the way, so you can move through this multi-screen world as easily as possible. It's why we're investing so much in platforms like our Chrome browser, Chrome OS and our Android mobile operating system. Ultimately, we want you to have speedy, secure access to whatever you need, wherever you happen to be, and on whatever device you may be using at the time.Ads as AnswersWe asked, what if ads weren't intrusive and annoying? What if we could deliver a relevant ad at just the right time and give people useful commercial information? What if we could provide products that allow for better attribution and measurement across screens so that we show great ads for the right people?Our advertising solutions help millions of companies grow their businesses, and we offer a wide range of products across screens and devices. We generate revenues primarily by delivering both performance advertising and brand advertising. BusinessesPerformance advertising creates and delivers relevant ads that users will click, leading to direct engagement with advertisers. Most of our performance advertisers pay us when a user engages in their ads. Performance advertising lets our advertisers connect with users while driving measurable results.2Alphabet Inc. and Google Inc. For performance advertisers, AdWords, our primary auction-based advertising program, helps create simple text-based ads that appear on Google websites and the websites of Google Network Members, who use our AdWords programadvertising programs to promotedeliver relevant ads alongside their productssearch results and services with targeted advertising.content. In addition, the third partiesour partners that comprise the Google Network use our AdSense program to deliver relevant ads that generate revenues and enhance the user experience. We also generate revenues from Motorola by selling hardware products.In December 2012,These programs let both small and large businesses connect with users looking for a specific item, say a pair of shoes or a plane ticket back home. To that end, we entered into an agreement with Arris Group, Inc. (Arris)continue to invest in our advertising programs and certain other persons providing for the disposition of our Motorola Home segment. The transaction is expected to close in 2013.Our business is primarily focused around the following key areas: search, advertising, operating systems and platforms, enterprise and hardware products.We were incorporated in California in September 1998 and reincorporated in Delaware in August 2003. Our headquarters are located at 1600 Amphitheatre Parkway, Mountain View, California 94043, and our telephone number is (650) 253-0000. We completed our initial public offering in August 2004 and our Class A common stock is listed on the Nasdaq Global Select Market under the symbol “GOOG.”2012 Corporate Highlights•Android—The growth of our Android operating system continues to impress with approximately half a billion Android devices activated globally through September 2012.•Google Play—We launched Google Play, an entirely cloud-based, digital entertainment destination with more than 700,000 apps and games plus music, movies and books that our users can find, enjoy and share on the web and on their Android phone or tablet.•Social—“Growing the + and shipping the Google.” In 2011, we launched Google+, a new way to share online just like users do in the real world, sharing different things with different people. In late 2011 and continuing in 2012, we have tightened integration between Google+ and our other Google properties, such as Gmail and YouTube and now have 235 million active users across our Google properties.•Nexus 7 Tablet—We launched a powerful new tablet in June 2012 with a vibrant, 7” high-definition display. The Tegra-3 chipset, with a quad-core CPU and 12-core GPU, makes everything, including games, extremely fast. And at only 340 grams, lighter than most tablets, Nexus 7 was built to bring users the best of Google that can be held in the palm of the user’s hand.•Google Now—We introduced Google Now, a predictive search feature that gets you just the right information at just the right time. It tells you the day’s weather before you start your day, how much traffic to expect before you leave for work or school, when the next train will arrive as you’re standing on the platform, or your favorite team’s score while they’re playing – all automatically with cards appearing throughout the day at the moment you need them.•Knowledge Graph—Google’s Knowledge Graph, introduced in 2012, enables the user to search for things, people or places that Google knows about – landmarks, celebrities, cities, sports teams, buildings, geographical features, movies, works of arts and more – and enhances Google Search by understanding the ambiguities in language and by better understanding a user’s query.On December 19, 2012, Google and Arris announced that Motorola Mobility had entered into an agreement (Motorola Agreement) with Arris and certain other persons providing for the disposition of the Home business for total consideration of approximately $2.35 billion in cash and common stock, subject to certain adjustments. Arris announced in January 2013 that it has agreed to sell approximately 10.6 million shares of its common stock, valued at $150.0 million, to Comcast Corporation with the closing of the Comcast investment and the Home business disposition expected to occur simultaneously. As provided for in the Motorola Agreement, the Comcast transaction will reduce the amount of stock consideration and increase the amount of cash consideration to be received by Google, but will not affect the total consideration. Specifically, the shares issued to Comcast will reduce, on a share-for-share basis, the number of shares of Arris common stock to be issued to Google and simultaneously increase the cash consideration to be received by Google by $150.0 million. Assuming the completion of the Comcast transaction, Comcast and Google will each own approximately 7.85% of the outstanding Arris common stock post-closing based on Arris’ capitalization as of the date of Arris’ announcement of the Comcast transaction. The disposition of the Home business to Arris is not contingent upon Arris’ sale of common stock to Comcast. In the event that Arris’ sale of common stock to Comcast does not close for any reason, there will be no reduction in the amount of shares of Arris common stock to be issued to Google and no corresponding increase in the amount of cash consideration. In that case, Google will own approximately 15.7% of the outstanding Arris common stock post-closing based on Arris’ capitalization as of the date of the Arris’ announced transaction with Google. The disposition of the Home business is expected to close in 2013.In January 2013, the FTC closed its investigations into our business practices, including search and advertising. In connection with the closing of the investigation, we have voluntarily agreed to make certain product changes. In addition, wesignificant upgrades, including Estimated Total Conversions, which help advertisers measure the effectiveness of their campaigns in a multi-screen world.Brand advertising helps enhance users' awareness of and Motorola have entered into a consent orderaffinity with the FTC setting forth certain guidelines on our use of standards-essential patents in litigation.SearchOur search technologies sort through an ever-growing amount of information to deliver relevant and useful search results in response to user queries. We integrate innovative features into our search service and offer specialized search services to help users tailor their search. In addition, we are constantly improving and adding to ouradvertisers' products and services, to provide users with more relevant results so that users find what they are looking for faster. For instance, when users want to plan a trip, Flight Search is a feature that makes it easy for users to find flights that meet their needs. Whether they have a specific destination with dates in mind or not, Flight Search can help users quickly find the best options for their trips. We also offer Product Listing Ads, which include richer product information, such as product image, price, and merchant information, without requiring additional keywords or ad text.In January 2012, we launched Search plus Your World. Now, when a user performs a signed-in search on Google, the user’s results page may include Google+ content from people that the user is close to (or might be interested in following). Relevant Google+ profiles and Google+ pages related to a specific topic or area of interest may also appear on a user’s results page.In 2012, we also introduced Google Now and Google’s Knowledge Graph. Google Now is a predictive search feature that gets you just the right information at just the right time. It tells you the day’s weather before you start your day, how much traffic to expect before you leave for work or school, when the next train will arrive as you’re standing on the platform, or your favorite team’s score while they’re playing—all automatically with cards appearing throughout the day at the moment you need them. Google’s Knowledge Graph, introduced in 2012,enables the user to search for things, people or places that Google knows about – landmarks, celebrities, cities, sports teams, buildings, geographical features, movies, works of arts and more – and enhances Google Search in three main ways:Find the Right Thing—By understanding the ambiguities and nuances in language the way users do, the Knowledge Graph makes Google Search more intelligent and relevant.Get the Best Summary—With the Knowledge Graph, we can better understand a user’s query, so that we can summarize relevant content around that topic, including key facts users likely need for that particular query.Go Deeper and Broader—The Knowledge Graph can help you make some unexpected discoveries. We’ve always believed that the perfect search engine should understand exactly what you mean and give you back exactly what you want. And we can sometimes help answer your next question before you’ve asked it, because the facts we show are informed by what other people have searched for.AdvertisingGoogle Search. The goal of AdWords, our primary auction-based advertising program, is to deliver ads that are so useful and relevant to search queries or web content that they are a form of information in their own right. With AdWords, advertisers create simple text-based ads that then appear beside related search results or web content on our websites and on thousands of partner websites in our Google Network, which is the network of third parties that use our advertising programs to deliver relevant ads with their search results and content. Most of our AdWords customers pay us on a cost-per-click basis, which means that an advertiser pays us only when a user clicks on one of its ads. We also offer AdWords on a cost-per-impression basis that enables advertisers to pay us based on the number of times their ads appear on our websites and our Google Network Members’ websites as specified by the advertiser.Our AdSense program enables websites that are part of the Google Network to deliver ads from our AdWords advertisers that are relevant to the search results or content on their websites. We share the majority of the revenues generated from these ads with the Google Network Members that display the ads. The AdSense program enables advertisers to extend the reach of their ad campaigns, improves our partners’ ability to generate revenue from their content, and delivers relevant ads for their users.To make mobile ad buying seamless and accessible for more than a million AdWords advertisers, we integrated our AdMob technology directly into our AdWords system in June 2012. This enables advertisers to run effective campaigns across the more than 300,000 mobile applications running ads by AdMob – all from within the AdWords interface. AdWords advertisers can now manage, measure and adjust search, display and video ads, reaching people on more than 2 million websites and hundreds of thousands of apps, across all screens.Google Display. Display advertising comprises thethrough videos, text, images, and other interactive ads that run across various devices. We help brand advertisers deliver digital videos and other types of ads to specific audiences for their brand-building marketing campaigns and in turn, generate revenue by distributing their ads such as the webTrueView ads displayed on computersour YouTube videos.We have built a world-class ad technology platform for brand advertisers, agencies, and publishers to power their digital marketing businesses. We aim to ensure great user experiences by serving the right ads at the right time and by building deep partnerships with brands and agencies. We also seek to improve the measurability of the effectiveness of brand advertising.Furthermore, we have invested significantly in programmatic advertising to help advertisers reach users when and where it matters, giving them access to top-tier inventory across screens and formats, as well as the real-time insights that advertisers need to make their buys count.We have allocated substantial resources to stopping bad advertising practices and protecting users on the web. We focus on creatingthe best advertising experiences for our users and advertisers in many ways,ranging from removing hundreds of millions of bad ads from our systems every year to closely monitoring the sites and apps that show our ads and blacklisting them when necessary to ensure that our ads do not fund bad content.Bringing the Next 5 Billion OnlineFast search and high-quality ads matter only if you have access to the Internet. Right now, only a fraction of the seven billion people in the world are fortunate enough to be able to get online. That leaves out billions of people. With so much useful and life-changing information available today, it is unfortunate that such a significant portion of the world's population lacks even the most basic Internet connection.Those people will be able to learn and start businesses, to grow and prosper in ways they simply could not without an Internet connection. Creating platforms for other people's success is a huge part of who we are. We want the world to join us online and to be greeted with the best possible experience once they get there. Connection is powerful; and we are working hard to make it a reality for everyone. The opportunities to improve lives on a grand scale are endless.And there are people around the world whose lives we can improve every day by bringing information into their homes, into their schools, and into their pockets -- showing them just how powerful the simple idea of "getting online" can be.At Google, we are helping people get online by tailoring hardware and software experiences that suit the needs of emerging markets, primarily through Android and Chrome. We're also making sure our core Google apps are fast and useful, especially for users in areas where speed, size and connectivity are central concerns.Other Alphabet companies are pursuing initiatives with similar goals too. That's why we're investing in new projects, like Project Loon. We asked, what if we could use a network of balloons that could fly at the edge of space and provide connectivity in rural and remote areas? Loon has helped students in Brazil and farmers in New Zealand experience the power of an internet connection for the first time. And as the program expands, we hope to bring this to more and more people -- creating opportunities that simply did not exist before for millions of people, all around the world.MoonshotsThe idea of trying new things is reflected in some of our new, ambitious projects both within Google and Other Bets. Everything might not fit into a neat little box. We believe that is exactly how to stay relevant. Many companies get comfortable doing what they have always done, making only incremental changes. This incrementalism leads to irrelevance over time, especially in technology, where change tends to be revolutionary, not evolutionary. People thought we were crazy when we acquired YouTube and Android, and when we launched Chrome. But as those efforts have matured into major platforms for digital video and mobile devices, including smart phones and handheld computers sucha safer, popular browser, respectively, we continue to look towards the future and continue to invest for the long-term.3Alphabet Inc. and Google Inc. We won't become complacent, relying solely on small tweaks as netbooks and tablets. The Google Display Network provides advertisers services related to the delivery of display advertising across publishers participating in our AdSense program, publishers participatingyears wear on. As we said in the DoubleClick Ad Exchange,2004 Founders' IPO Letter, we will not shy away from high-risk, high-reward projects that we believe in because they are the key to our long-term success. We won't stop asking "What if?" and Google-owned sites such as YouTube and Google Finance.Throughthen working hard to find the answer.As explained in the letter from our DoubleClick advertising technology,CEO in August 2015, our Alphabet reorganization was implemented to better allow us to structure teams in ways that we provide to publishers, agencies, and advertisersbelieve will produce the ad serving technology, which is the infrastructure that enables billions of ads to be served each day across the web. Our DoubleClick Ad Exchange creates a real-time auction marketplacefastest, most focused innovation possible for the trading of display ad space. We aim to simplify display advertising so it is easier for advertisers and publishers to manage campaigns across different formats, on different websites, and for different devices.In addition, YouTube provides a range of video, interactive, and other ad formats for advertisers to reach their intended audience. YouTube’s video advertising solutions give advertisers a way to promote their content to theYouTube community, as well as to associate with content being watched by their target audience. YouTube also offers analytic tools to help advertisers understand their audience and derive general business intelligence. In the past year, YouTube has experienced strong growth in mobile viewers and has established key partnerships with content companies to help monetize mobile video.Google Mobile.Mobile advertising is still in early innings, though the mobile device is quickly becoming the world’s newest gateway to information. Google is focused on developing easy-to-use ad products to help advertisers extend their reach, help create revenue opportunities for our publisher partners, and deliver relevant and useful ads to users on the go.Google Mobile extends our products and services by providing mobile-specific features to mobile device users. Our mobile-specific search technologies include search by voice, search by sight, and search by location. Google Mobile also optimizes a large number of Google’s applications for mobile devices in both browser and downloadable form. In addition, we offer advertisers the ability to run search ad campaigns on mobile devices with popular mobile-specific ad formats, such as click-to-call ads in which advertisers can include a phone number within ad text. AdMob also offers effective ad units and solutions for application developers and advertisers. moonshot projects.ResearchWe continue to invest in improving users’ access to Google services through their mobile devices.Google Local. Google is committed to providing users with relevant local information. We’ve organized information around more than 80 million places globally from various sources across the web. Users can find addresses, phone numbers, hours of operation, directions and more for millions of local queries like shops, restaurants, parks and landmarks right on Google.com, on Google Maps and on Google Maps for mobile. They can also discover more places that are right for them by rating the places they’ve been, and getting customized recommendations based on their tastes and those of their friends directly within Google Maps. Ourour existing products and services, also help local business owners manage their online presenceincluding search and connect with potential customers. Millions of business owners have verified their free business listings via Google Places to ensure that users have up-to-date information about their establishments, and to contribute additional details such as photos and products/services offered. Google Offers brings people daily deals from local and national businesses, redeemable for discounted goods or services. From restaurants to spa treatments to outdoor adventures, Google has deals from the best businesses a city has to offeradvertising, as well as popular national brands.Operating Systems and PlatformsAndroid. Working closely with the Open Handset Alliance, a business alliance of more than 75 technology and mobile companies, we developed Android, a free, fully open source mobile software platform that any developer can use to create applications for mobile devices and any handset manufacturer can install on a device. We believe Android will drive greater innovation and choice in the mobile device ecosystem, and provide consumers with a more powerful mobile experience.Google Chrome OS and Google Chrome.Google Chrome OS is an open source operating system with the Google Chrome web browser as its foundation. Both the Google Chrome OS and the Google Chrome browser are built around the core tenets of speed, simplicity, and security. Designed for people who spend most of their time on the web, the Google Chrome OS is a new approach to operating systems. We are working with several original equipment manufacturers to bring computers running Google Chrome OS to users and businesses. The Chrome browser runs on Windows, Mac, and Linux computers.Google+. Google+ is a new way to share online just like users do in the real world, sharing different things with different people. In late 2011 and continuing in 2012, we have tightened integration between Google+ and our other Google properties, such as Gmail and YouTube and now have 235 million active users across our Google properties.Google Play. Google Play is an entirely cloud-based, digital entertainment destination with more than 700,000 apps and games plus music, movies and books that our users can find, enjoy and share on the web and on their Android phone or tablet.Google Drive. Google Drive is a place where users can create, share, collaborate, and keep all of their stuff. Google Docs is built right into Google Drive so users can work with others in real time on documents, spreadsheets and presentations and users’ files go everywhere they do. When users change a file on the web, on their computer, or on their mobile device, the file updates on every device where users have installed Google Drive.Google Wallet. Google Wallet is a virtual wallet that securely stores your credit and debit cards, offers, and rewards cards. Users can tap their phone to pay in-store using Google Wallet anywhere contactless payments are accepted – at over 200,000 merchants across the United States. Users can also pay online by signing into their Google Wallet account.Google TV. Google TV is a platform that gives consumers the power to experience television and the internet on a single screen, with the ability to search and find the content they want to watch. The Google TV platform is based on the Android operating system and runs the Google Chrome browser.EnterpriseGoogle’s enterprise products provide familiar, easy-to-use Google technology for business settings. Through Google Apps, which includes Gmail, Google Docs, Google Calendar, and Google Sites, among other features, we provide hosted, web-based applications that people can use on any device with a browser and an internet connection. In addition, we provide our search technology for use within enterprises through the Google Search Appliance (real-time search of business applications, intranet applications, and public websites), on their public-facing sites with Google Site Search (custom search engine), and Google Commerce Search (for online retail enterprises). We also provide versions of our Google Maps Application Programming Interface (API) for businesses (including fully interactive Google Maps for public and internal websites), as well as Google Earth Enterprise (a behind-the-company-firewall software solution for imagery and data visualization). Our enterprise solutions have been adopted by a variety of businesses, governments, schools, and non-profit organizations. Google Apps is the first cloud computing suite of message and collaboration tools to receive U.S. government security certification.MotorolaOur Motorola Mobility business is comprised of two operating segments. The Mobile segment is focused on mobile wireless devices and related products and services. The Home segment is focused on technologies and devices that provide video entertainment services to consumers by enabling subscribers to access a variety of interactive digital television services. In December 2012, we entered into an agreement with Arris Group, Inc. and certain other persons providing for the disposition of our Home segment. The transaction is expected to close in 2013.ResearchWe continue to developdeveloping new products and services and to enhance our existing ones through research and product development and the licensing and acquisition of third-party businesses and technology. Our product development philosophy is to launch innovative products early and often, and then iterate rapidly to make those products even better.development. We often post early stage products at test locations online or directly on Google.com.release early-stage products. We then use data and user feedback to decide if and how to invest further in those products.Our research and development expenses, which includes the vast majority of engineering and technical headcount responsible for research and development, as well as their associated costs, were $3.8$7.1 billion, $5.2$9.8 billion, and $6.8$12.3 billion in 2010, 2011,2013, 2014 and 2012,2015, respectively, which included stock-based compensation expense of $861 million, $1.1$1.6 billion, $2.2 billion, and $1.3$2.7 billion, respectively. We expect to continue investing in hiring talented employees and building systems to invest in building the employee and systems infrastructures needed to support the development ofdevelop new products and services and to improve existing ones.Intellectual PropertyWe rely on a combination of intellectual property laws, as well as confidentiality procedures and contractual provisions, to protect our proprietary technology and our brand. We have registered, and applied for the registration of, U.S. and international trademarks, service marks, domain names, and copyrights. Additionally, we have filed U.S. and international patent applications covering certain of our proprietary technology. Over time, we have assembled a portfolio of patents, trademarks, service marks, copyrights, domain names, and trade secrets covering our products and services. Our proprietary technology is not dependent on any single patent or copyright or groups of related patents or copyrights. We believe the duration of our patents is adequate relative to the expected lives of our products. Although we rigorously protect our proprietary technology, any significant impairment of, or third-party claim against, our intellectual property rights could harm our business or our ability to compete.Sales and SupportWe continue to develop and grow our sales and support infrastructure. We have over 85 offices in over 40 countries, the large majority of which include sales people. Our global sales and support infrastructure has specialized teams across vertical markets. We bring businesses into our advertising network through direct, remote, and online sales channels, using technology and automation wherever possible to improve our customers’ experience and to grow our business cost-effectively. Our direct advertising and sales teams focus on building relationships with the largest advertisers and leading internet companies. We have built a multi-product sales force, with teams selling campaigns that include search, display (including DoubleClick and YouTube), and mobile advertising.We provide customer service to our advertiser base through our global support organization. Our global support organization concentrates on helping our advertisers and Google Network Members get the most out of their relationship with us.No individual customer or groups of affiliated customers represented more than 10% of our revenues in 2010, 2011, or 2012.Government ContractsNo material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.MarketingGoogle’s global brand is well known. We believe that building a trusted, highly recognized brand begins with providing high-quality products and services that make a notable difference in people’s lives. Marketing is responsible for generating advertiser revenue through marketing campaigns to small businesses, as well as providing thought leadership to chief marketing officers through industry insight, research, and analysis. Our marketing, promotional, and public relations activities are designed to promote Google’s brand image and differentiate it from competitors.CompetitionOur business is characterized by rapid change and converging, as well as new and disruptive technologies. We face formidable competition in every aspect of our business, particularly from companies that seek to connect people with online information on the web and provide them with relevant advertising. We face competition from:Microsoft’s Bing.Monster.comLinkedIn (job queries), WebMD (for health(health queries), and Amazon.comAmazon and eBay (e-commerce). Some users will navigate directly to such content, websites, and apps rather than go through Google.
Social networks, such as Facebook and Twitter. Some users are increasingly relying more on social networks for product or service referrals, rather than seeking information through general purposetraditional search engines.
Other forms of advertising, such as television, radio, newspapers, magazines, billboards, and yellow pages, for ad dollars.pages. Our advertisers typically advertise in multiple media, both online and offline.
Mobile applications on iPhoneOther online advertising platforms and Android devices, which allow users to access information directly from a publisher without using search engines.
Other operating systems and mobile device companies.
We competeand technologies to the marketplace so that we can attract and retain users,retain:
We also compete
Government Regulation
| Alphabet Inc. and Google Inc. | |
parties.
Atsociety.
Global Operations and Geographic Data
We provide our products and services in more than 100 languages and in more than 50 countries, regions, and territories. On www.google.com or one of our other Google domains, users can find information in many
different languages and in many different formats. The United States accounted for approximately 47% of our revenues in 2012. Information regarding financial data by geographic areas is set forth in Item 7 and Item 8 of this Annual Report on Form 10-K. See Note 15 of Notes to Consolidated Financial Statements under Item 8.
Part II of this Annual Report on Form 10-K.
| Alphabet Inc. and Google Inc. | |
Industries
can or may foresee the consumer need for products and services before us.
Acquisitions
| Alphabet Inc. and Google Inc. | |
Acquisitions are an important elementtablets, video game consoles, and television set-top devices, is increasing dramatically. The functionality and user experience associated with some alternative devices may make the use of our overall corporate strategyproducts and useservices through such devices more difficult (or just different) and the versions of capital,our products and services developed for these devices may not be compelling to users, manufacturers, or distributors of alternative devices. Each manufacturer or distributor may establish unique technical standards for its devices, and our products and services may not work or be viewable on these devices as a result. Some manufacturers may also elect not to include our products on their devices. In addition, search queries are increasingly being undertaken via “apps” tailored to particular devices or social media platforms, which could affect our search and advertising business over time. As new devices and platforms are continually being released, it is difficult to predict the problems we expectmay encounter in adapting our current pace of acquisitions to continue. These transactions could be material to our financial conditionproducts and results of operations.services and developing competitive new products and services. We also expect to continue to evaluatedevote significant resources to the creation, support, and enter into discussions regardingmaintenance of products and services across multiple platforms and devices. If we are unable to attract and retain a wide arraysubstantial number of potential strategic transactions. The process of integrating an acquired company, business,alternative device manufacturers, distributors, developers, and users to our products and services, or technology has created,if we are slow to develop products and will continue to create, unforeseen operating difficultiestechnologies that are more compatible with alternative devices and expenditures. The areas whereplatforms, we face risks include:
Diversion of management time and focus from operating our business to acquisition integration challenges.
Failure to successfully further develop the acquired business or technology.
Implementation or remediation of controls, procedures, and policies at the acquired company.
Integration of the acquired company’s accounting, human resource, and other administrative systems, and coordination of product, engineering, and sales and marketing functions.
Transition of operations, users, and customers onto our existing platforms.
Failure to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval, under competition and antitrust laws which could, among other things, delay or prevent us from completing a transaction, or otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition.
In the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries.
Cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire.
Liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities, and other known and unknown liabilities.
Litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders, or other third parties.
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us towill fail to realizecapture the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities,opportunities available as consumers and harm our business generally.
Future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, or amortization expenses, or impairment of goodwill, and restructuring charges, any of which could harm our financial condition or results. Also, the anticipated benefit of many of our acquisitions may not materialize.
advertisers transition to a dynamic, multi-screen environment.
and act on them, geographical mix
The revenue growth rate of our Motorola business will also depend on a number of factors, including the success of the new products we plan to introduce, our reliance on several large customers, the absence of long-term exclusivity arrangements with such customers, our ability to gain significant market share in the mobile devices space, our reliance on third-party distributors, representatives and retailers to sell certain of its products and the successful implementation of our product and operating system strategies. Furthermore, industry consolidation in the telecommunications and cable industries could negatively impact Motorola’s business because there would be fewer network operators and it could be more difficult to replace any lost customers. Any of these factors could have a negative impact on Motorola’s business and have an adverse effect on our consolidated financial results.
technologies.
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impact on us because of legal costs, diversion of management resources, and other factors. Determining reserves for our pending litigation is a complex, fact-intensive process that requires significant judgment. It is possible that a resolution of one or more such proceedings could result in substantial fines and penalties that could adversely affect our business, consolidated financial position, results of operations, or cash flows in a particular period. These proceedings could also result in reputational harm, criminal sanctions, consent decrees, or orders preventing us from offering certain features, functionalities, products, or services, requiring a change in our business practices or product recalls or other field action, or requiring development of non-infringing or otherwise altered products or technologies. Any of these consequences could adversely affect our business and results of operations.
More people
The numbermaterial to our financial condition and results of people who access the internet through devices other than personal computers, including mobile phones, smartphones, handheld computers such as netbooks and tablets, video game consoles, and television set-top devices, has increased dramatically in the past few years. The lower resolution, functionality, and memory associated with some alternative devices make the use of our products and services through such devices more difficult and the versions of our products and services developed for these devices may not be compelling to users, manufacturers, or distributors of alternative devices. Each manufacturer or distributor may establish unique technical standards for its devices, and our products and services may not work or be viewable on these devices as a result. Some manufacturers may also elect not to include our products on their devices. In addition, search queries are increasingly being undertaken via “apps” tailored to particular devices or social media platforms, which could affect our share of the search market over time. As new devices and platforms are continually being released, it is difficult to predict the problems we may encounter in adapting our products and services and developing competitive new products and services.operations. We expect to continue to devote significant resourcesevaluate and enter into discussions regarding a wide array of potential strategic transactions. The process of integrating an acquired company, business, or technology has created, and will continue to create, unforeseen operating difficulties and expenditures. The areas where we face risks include:
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harm our business generally.
The
that are truly useful and play a meaningful role in people’s everyday lives.
Furthermore, many of these laws were adopted prior to the advent of the internet and related technologies and, as a result, do not contemplate or address the unique issues of the internet and related technologies. The laws that do reference the internet are being interpreted by the courts, but their applicability and scope remain uncertain. For example, the laws relating to the liability of providers of online services are currently unsettled both within the U.S. and abroad.
In addition, theor otherwise harm our business include, among others:
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Any failure on our part to comply with these laws and regulations can result in negative publicity and diversion of management time and effort and may subject us to significant liabilities and other penalties.
indemnify Arris against certain intellectual property infringement litigation, including, among others, a patent infringement claim brought by TiVo relating to certain digital video recording equipment sold by Motorola Mobility.
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non-U.S. law.
products, services, or content by virtue of our involvement in marketing, branding, broadcasting, or providing access to them, even if we do not ourselves host, operate, provide, or provide access to these products, services, or content. Defense of any such actions could be costly and involve significant time and attention of our management and other resources, may result in monetary liabilities or penalties, and may require us to change our business in an adverse manner.
With our acquisition
With our acquisition of Motorola, we face a number of risks related to manufacturing and supply chain management. For instance,data. However, given the products we sell may have quality issues resulting from the design or manufacturepreliminary nature of the product, or from the software used in the product. Sometimes, these issues may be caused by components we purchase from other manufacturers or suppliers. If the quality of our Motorola products does not meet our customers’ expectations or our products are foundagreement, some uncertainty remains, and compliance obligations could cause us to be defective, then our sales and operating earnings, and ultimately our reputation, could be negatively impacted.
We rely on third parties to manufacture many of Motorola’s assemblies and finished products, and we have third-party arrangements for the design of some components and parts. Our Motorola business could be negatively affected if we are not able to engage third parties with the necessary capabilities or capacity on reasonable terms, or if those we engage fail to meet their obligations (whether due to financial difficulties or other reasons), or make adverse changes in the pricing or other materials terms of our arrangements with them.
Motorola, like many electronics manufacturers, has also experienced supply shortages and price increases in the past driven by raw material availability, manufacturing capacity, labor shortages, industry allocations, natural
disasters and significant changes in the financial or business condition of its suppliers. Workaround plans to address shortages have entailed in the past, and could entail in the future, increased freight costs for expedited shipments. We cannot assure you that we will not experience shortages or other supply chain disruptions in the future or that they will not negatively impact our operations. In addition, some of the components we use in our Motorola products are available only from a single source or limited sources, and we cannot assure you that we would be able to find replacement vendors on favorable terms or at all in the event of a supply chain disruption.
Additionally, because many of our supply contracts have volume-based pricing or minimum purchase requirements, if the volume of our Motorola sales decreases or does not reach projected targets, we could face increased materials and manufacturingincur costs or other financial liabilities that could makerequire us to change our Motorola products more costly per unit to manufacture and therefore less competitive and negatively impact our financial results. Further, certain of our competitors may negotiate more favorable contractual terms based on volume and other commitments that may provide them with competitive advantages and may impact our supply.
We also require our suppliers and business partners to comply with law and company policies regarding workplace and employment practices environmental compliance and intellectual property licensing, but we do not control them or their practices. If any of them violates laws or implements practices regarded as unethical, we could experience supply chain disruptions, canceled orders, terminations of or damage to key relationships, and damagein a manner adverse to our reputation. If any of them fails to procure necessary license rights to third-party intellectual property, legal action could ensue that could impact the salability of our products and expose us to financial obligations to third parties.
The Dodd-Frank Wall Street Reform and Consumer Protection Act included disclosure requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries (DRC) and procedures regarding a manufacturer’s efforts to prevent the sourcing of such “conflict” minerals. SEC rules implementing these requirements may have the effect of reducing the pool of suppliers who can supply DRC “conflict free” components and parts, and we may not be able to obtain DRC conflict free products or supplies in sufficient quantities for our operations. Also, since our supply chain is complex, we may face reputational challenges with our customers, stockholders and other stakeholders if we are unable to sufficiently verify the origins for the conflict minerals used in our products.
business.
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Web spam and content farms could decrease our search quality, which could damage our reputation and deter our current and potential users from using our products and services.
“Web spam” refers to websites that attempt to violate a search engine’s quality guidelines or that otherwise seek to rank higher in search results than a search engine’s assessment of their relevance and utility would rank them. Although English-language web spam in our search results has been significantly reduced, and web spam in most other languages is limited, we expect web spammers will continue to seek ways to improve their rankings inappropriately. We continuously combat web spam, including through indexing technology that makes it harder for spam-like, less useful web content to rank highly.
Interruptionissues may be caused by components we purchase from other manufacturers or failure of our information technology and communications systems could hurt our ability to effectively provide our products and services, which could damage our reputation and harm our operating results.
The availabilitysuppliers. If the quality of our products does not meet our customers' expectations or our products are found to be defective, then our sales and services dependsoperating earnings, and ultimately our reputation, could be negatively impacted.
Our international operations expose us to additional risksmanufacturing costs or other financial liabilities that could harmmake our business, operating results,hardware products more costly per unit to manufacture and therefore less competitive and negatively impact our financial condition.
Our international operations are significant to our revenues and net income, and we plan to further expand internationally. International revenues accounted for approximately 53%results. Further, certain of our consolidated revenues in 2012,competitors may negotiate more favorable contractual terms based on volume and more than half of our user traffic has been coming from outside the U.S. In certain international markets, we have limited operating experienceother commitments that may provide them with competitive advantages and may not benefit from any first-to-market advantages or otherwise succeed.
Our Motorola businessimpact our supply.
Moreover,
| Alphabet Inc. and Google Inc. | |
yearscould harm our business, operating results, and financial condition.
not benefit from any first-to-market advantages or otherwise succeed.
Changes in local political, economic, regulatory, tax, social, and labor conditions, which may adversely harm our business.
Restrictions on foreign ownership and investments, and stringent foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S.
Import and export requirements, tariffs, trade disputes and barriers, and customs classifications that may prevent us from offering products or providing services to a particular market and may increase our operating costs.
Potential injunctions from importation into the U.S. of our Motorola products manufactured outside the U.S. in an ITC matter.
Longer payment cycles in some countries, increased credit risk, and higher levels of payment fraud.
Still developing foreign laws and legal systems.
Uncertainty regarding liability for services and content, including uncertainty as a result of local laws and lack of legal precedent.
Different employee/employer relationships, existence of workers’workers' councils and labor unions, and other challenges caused by distance, language, and cultural differences, making it harder to do business in certain jurisdictions.
Natural disasters, military or political conflicts, including war and other hostilities, and public health issues and outbreaks.
In addition, compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business. These numerous and sometimes conflicting laws and regulations include internal control and disclosure rules, data privacy and filteringdata protection requirements, anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials, and antitrust and competition regulations, among others. Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our brand, our international expansiongrowth efforts, our ability to attract and retain employees, our business, and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies.
| Alphabet Inc. and Google Inc. | |
on our past results as an indication of our future performance. Our quarterly, year-to-date, and annual expenses as a percentage of our revenues may differ significantly from our historical or projected rates. Our operating results in future quarters may fall below expectations. Any of these events could cause our stock price to fall. Each of the risk factors listed in this section in addition to the following factors may affect our operating results:
Our ability to continue to attract users to our websites and satisfyretain existing users on our websites.
Our ability to monetize (or generate revenues from) traffic on ourGoogle websites and our Google Network Members’ websites.
Our ability to attract advertisers to our AdWords program,Members' websites both on desktop and our ability to attract websites to our AdSense program.
The mix in our revenues between those generated on our websites and those generated through our Google Network and other factors, such asRevenue fluctuations caused by changes in productproperty mix, including a significant increase in mobile search queriesplatform mix, and a deceleration in the growth of desktop queries if monetization stays at current levels, and the geographic mix of our revenues that can affect revenue growth rates and margins.
The amount of revenues and expenses generated and incurred in currencies other than U.S. dollars, and our ability to manage the resulting risk through our foreign exchange risk management program.
The amount and timing of operating costs and expenses and capital expenditures related to the maintenance and expansion of our businesses, operations, and infrastructure.
Our focus on long-term goals over short-term results.
The results of our acquisitions and our investments in risky projects, including new business strategies and newbusinesses, products, services, technologies and acquisitions.
Our ability to keep our websites operational at a reasonable cost and without service interruptions.
Our ability to generate significant revenues from new products and services in which we have invested considerable time and resources, such as Google Wallet.
programs, may not always be successful in attracting new employees and retaining and motivating our existing employees. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate our existing employees.
| Alphabet Inc. and Google Inc. | |
investments.
volatile.
Quarterly variations in our results of operations or those of our competitors.
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Recommendations by securities analysts or changes in earnings estimates.
Announcements about our earnings that are not in line with analyst expectations, the risk of which is enhanced because it is our policy not to give guidance on earnings.
Announcements by our competitors of their earnings that are not in line with analyst expectations.
Commentary by industry and market professionals about our products, strategies, and other matters affecting our business and results, regardless of its accuracy.
The volume of shares of Class A common stock and Class C capital stock available for public sale.
Sales of Class A common stock and Class C capital stock by us or by our stockholders (including sales by our directors, executive officers, and other employees).
Short sales, hedging, and other derivative transactions on shares of our Class A common stock (including derivative transactions under our Transferable Stock Option program).
In addition, we have announced the intention of our board of directors to consider a distribution of shares of our non-votingand Class C capital stock as a dividend to our holdersstock.
Although we plan to list the Class C capital stock on The Nasdaq Stock Market, we cannot predict whether, or to what extent, a liquid trading market will develop for the Class C capital stock. If it does not or if the Class C capital stock is not attractive to targets as an acquisition currency or to our employees as an incentive, we may not achieve our objectives in creating this new class. As in the case of the Class A common stock, the trading price for the Class C capital stock may also be volatile and affected by the factors noted above, as well as by the difference in voting rights as between the Class A common stock and the Class C capital stock the volume of Class C capitalrelative to one another.
repurchase program.
common stock, representingwhich represented approximately 65%58.5% of the voting power of our outstanding capital stock. Larry, Sergey, and Eric therefore have significant influence over management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or our assets, for the foreseeable future. In addition, because our Class C capital stock carries no voting rights (except as required by applicable law), the issuance of the Class C capital stock, including in future stock-based acquisition transactions and to fund employee equity incentive programs, could prolong the duration of Larry and Sergey’s current relative ownership of our voting power and their ability to elect all of our directors and to determine the outcome of most matters submitted to a vote of our stockholders. Together with Eric, they would also continue to be able to control any required stockholder vote with respect to certain change in control transactions involving GoogleAlphabet (including an acquisition of GoogleAlphabet by another company).
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Our board of directors has the right to elect directors to fill a vacancy created by the expansion of the Boardboard of Directorsdirectors or the resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors.
Our stockholders may not act by written consent. As a result, a holder, or holders, controlling a majority of our capital stock would not be able to take certain actions without holding a stockholders’stockholders' meeting.
Our certificate of incorporation prohibits cumulative voting in the election of directors. This limits the ability of minority stockholders to elect director candidates.
Stockholders must provide advance notice to nominate individuals for election to the Boardboard of Directorsdirectors or to propose matters that can be acted upon at a stockholders’ meeting. These provisions may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’sacquirer's own slate of directors or otherwise attempting to obtain control of our company.
Our board of directors may issue, without stockholder approval, shares of undesignated preferred stock. The ability to issue undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.
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In addition, we lease approximately 3.8 million square feet of office space and approximately 61 acres of undeveloped land in and near our headquarters in Mountain View, California. We also lease additional research and development, and sales and support offices throughout the United States and maintain leased facilities internationally in countries around the world. Larger leased sites include properties located in Dublin, Ireland; Zurich, Switzerland; London, UK; Hyderabad, India; San Francisco, CA; San Bruno, CA; Paris, France; Hamburg, Germany; Tel Aviv, Israel; Sao Paulo, Brazil; Ann Arbor, MI; Bothell, WA; Cambridge, MA; Chicago, IL; Kirkland, WA; Venice, CA; Pittsburgh, PA; Seattle, WA; Sydney, Australia; Beijing, China; Shanghai, China; Bangalore, India; Gurgaon, India; Tokyo, Japan; and Singapore.
Motorola also operates manufacturing facilities, research and development, administrative and sales offices in various U.S. locations and in many foreign countries. Motorola owns eight facilities (manufacturing, sales, service and offices), five of which are located in the Americas Region (U.S., Canada, Mexico, Central America and South America) and three of which are located in other countries. As of December 31, 2012, Motorola leased 97 facilities, 31 of which are located in the Americas Region and 66 of which are located in other countries. Motorola Mobility owns three major facilities for the manufacturing and distribution of its products. These facilities are located in Tianjin, China; Hsin Tien, Taiwan; and Jaguariuna, Brazil. As previously reported, Motorola is executing a significant consolidation of its portfolio, which will reduce the number of facilities worldwide, including manufacturing, sales and marketing, and research and development locations.
We believe our existing facilities, both owned and leased, are in good condition and suitable for the conduct of our business. Motorola generally considers the productive capacity of the plants operated by each of its business segments to be adequate and sufficient for the requirements of each business group. The extent of utilization of such manufacturing facilities varies from plant to plant and from time to time during the year.
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Fiscal Year 2012 Quarters Ended: | High | Low | ||||||
March 31, 2012 | $ | 670.25 | $ | 564.55 | ||||
June 30, 2012 | 653.14 | 556.52 | ||||||
September 30, 2012 | 764.89 | 562.09 | ||||||
December 31, 2012 | 774.38 | 636.00 | ||||||
Fiscal Year 2011 Quarters Ended: | High | Low | ||||||
March 31, 2011 | $ | 642.96 | $ | 551.28 | ||||
June 30, 2011 | 595.19 | 473.02 | ||||||
September 30, 2011 | 627.50 | 490.86 | ||||||
December 31, 2011 | 646.76 | 480.60 | ||||||
| Fiscal Year 2015 Quarters Ended: | High | Low | |||||
| March 31, 2015 | $ | 581.44 | $ | 497.06 | |||
| June 30, 2015 | 573.66 | 532.74 | |||||
| September 30, 2015 | 699.62 | 541.70 | |||||
| December 31, 2015 | 793.96 | 642.00 | |||||
| Fiscal Year 2014 Quarters Ended: | High | Low | |||||
| March 31, 2014 | $ | 610.70 | $ | 551.17 | |||
| June 30, 2014 | 585.93 | 518.00 | |||||
| September 30, 2014 | 605.40 | 571.81 | |||||
| December 31, 2014 | 587.78 | 498.16 | |||||
| Fiscal Year 2015 Quarters Ended: | High | Low | |||||
| March 31, 2015 | $ | 575.33 | $ | 492.55 | |||
| June 30, 2015 | 565.06 | 520.51 | |||||
| September 30, 2015 | 672.93 | 516.83 | |||||
| December 31, 2015 | 776.60 | 611.29 | |||||
| Fiscal Year 2014 Quarters Ended: | High | Low | |||||
| March 31, 2014 | $ | — | $ | — | |||
| June 30, 2014 | 578.65 | 509.96 | |||||
| September 30, 2014 | 596.08 | 562.73 | |||||
| December 31, 2014 | 577.35 | 495.39 | |||||
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Stock Performance Graph
This performance graph shall not be deemed “filed” for purposes
| Period | Total Number of Shares Purchased (in thousands) (1) | Average Price Paid per Share (2) | Total Number of Shares Purchased as Part of Publicly Announced Programs (in thousands) (1) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (in millions) | ||||||||||
| October 1 - 31 | 0 | $ | 0.00 | 0 | $ | 5,099 | ||||||||
| November 1 - 30 | 1,500 | $ | 737.72 | 1,500 | $ | 3,934 | ||||||||
| December 1 - 31 | 891 | $ | 757.04 | 891 | $ | 3,319 | ||||||||
| Total | 2,391 | $ | 744.68 | 2,391 | ||||||||||
(1) | In October 2015, the board of directors of Alphabet authorized the company to repurchase up to $5,099,019,513.59 of its Class C capital stock, commencing in the fourth quarter of 2015. The repurchases are being executed from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated transactions, including through the use of 10b5-1 plans. The repurchase program does not have an expiration date. Refer to Note 13 in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to share repurchases. |
(2) | Average price paid per share includes costs associated with the repurchases. |
Regulation D.
| Alphabet Inc. and Google Inc. | |
Results
Under our TSO program, eligible employees are able to sell vested stock options to participating financial institutionsSection 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act), or incorporated by reference into any filing of Alphabet under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in an online auction as an alternative to exercising options in the traditional method and then selling the underlying shares. The following table provides information with respect to sales by our employees of TSOs during the three months ended December 31, 2012:
| Aggregate Amounts | Weighted-Average Per Share Amounts | |||||||||||||||||||||||
Period(1) | Number of Shares Underlying TSOs Sold | Sale Price of TSOs Sold | TSO Premium(2) | Exercise Price of TSOs Sold | Sale Price of TSOs Sold | TSO Premium(2) | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
October 1 – 31 | 49,772 | $ | 15,307 | $ | 514 | $ | 381.19 | $ | 307.55 | $ | 10.34 | |||||||||||||
November 1 – 30 | 190,351 | 66,001 | 1,153 | 338.77 | 346.73 | 6.06 | ||||||||||||||||||
December 1 – 31 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
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|
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| |||||||||||||||||||
Total (except weighted-average per share amounts) | 240,123 | $ | 81,308 | $ | 1,667 | $ | 347.56 | $ | 338.61 | $ | 6.95 | |||||||||||||
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Our TSO program allows participation by executive officers (other than Larry Page, Sergey Brin, and Eric E. Schmidt). The following table provides information with respect to sales by our executive officers of TSOs during the three months ended December 31, 2012:
| Aggregate Amounts | ||||||||||||
Executive Officer | Number of Shares Underlying TSOs Sold | Sale Price of TSOs Sold | TSO Premium | |||||||||
| (in thousands) | ||||||||||||
Nikesh Arora | 2,843 | $ | 999 | $ | 3 | |||||||
Patrick Pichette | 9,291 | $ | 2,441 | $ | 177 | |||||||
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| |||||||
Total | 12,134 | $ | 3,440 | $ | 180 | |||||||
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| |||||||
such filing.
The consolidated statements of income data for the years ended December 31, 2010, 2011, and 2012 and the consolidated balance sheet data at December 31, 2011, and 2012 are derived from our audited consolidated financial statements appearing in Item 8 of this Annual Report on Form 10-K. The consolidated statements of income data for the years ended December 31, 2008 and 2009, and the consolidated balance sheet data at December 31, 2008, 2009, and 2010, are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. The historical results are not necessarily indicative of the results to be expected in any future period.
| Year Ended December 31, | ||||||||||||||||||||
| 2008 | 2009 | 2010 | 2011 | 2012 | ||||||||||||||||
| (in millions, except per share amounts) | ||||||||||||||||||||
Consolidated Statements of Income Data: | ||||||||||||||||||||
Revenues | $ | 21,796 | $ | 23,651 | $ | 29,321 | $ | 37,905 | $ | 50,175 | ||||||||||
Income from operations | 6,632 | 8,312 | 10,381 | 11,742 | 12,760 | |||||||||||||||
Net income from continuing operations | 4,227 | 6,520 | 8,505 | 9,737 | 10,788 | |||||||||||||||
Net loss from discontinued operations | 0 | 0 | 0 | 0 | (51 | ) | ||||||||||||||
Net income | 4,227 | 6,520 | 8,505 | 9,737 | 10,737 | |||||||||||||||
Net income (loss) per share of Class A and Class B common stock—basic | ||||||||||||||||||||
Continuing operations | $ | 13.46 | $ | 20.62 | $ | 26.69 | $ | 30.17 | $ | 32.97 | ||||||||||
Discontinued operations | 0 | 0 | 0 | 0 | $ | (0.16 | ) | |||||||||||||
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| |||||||||||
Net income per share of Class A and Class B common stock—basic | $ | 13.46 | $ | 20.62 | $ | 26.69 | $ | 30.17 | $ | 32.81 | ||||||||||
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Net income (loss) per share of Class A and Class B common stock—diluted | ||||||||||||||||||||
Continuing operations | $ | 13.31 | $ | 20.41 | $ | 26.31 | $ | 29.76 | $ | 32.46 | ||||||||||
Discontinued operations | 0 | 0 | 0 | 0 | $ | (0.15 | ) | |||||||||||||
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Net income per share of Class A and Class B common stock—diluted | $ | 13.31 | $ | 20.41 | $ | 26.31 | $ | 29.76 | $ | 32.31 | ||||||||||
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| As of December 31, | ||||||||||||||||||||
| 2008 | 2009 | 2010 | 2011 | 2012 | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Cash, cash equivalents, and marketable securities | $ | 15,846 | $ | 24,485 | $ | 34,975 | $ | 44,626 | $ | 48,088 | ||||||||||
Total assets | 31,768 | 40,497 | 57,851 | 72,574 | 93,798 | |||||||||||||||
Total long-term liabilities | 1,227 | 1,746 | 1,614 | 5,516 | 7,746 | |||||||||||||||
Total stockholders’ equity | 28,239 | 36,004 | 46,241 | 58,145 | 71,715 | |||||||||||||||
| Alphabet Inc. and Google Inc. | |
| Year Ended December 31, | |||||||||||||||||||
2011(1) | 2012(1) | 2013(1) | 2014(1) | 2015 | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Consolidated Statements of Income Data: | |||||||||||||||||||
| Revenues | $ | 37,905 | $ | 46,039 | $ | 55,519 | $ | 66,001 | $ | 74,989 | |||||||||
| Income from operations | 11,742 | 13,834 | 15,403 | 16,496 | 19,360 | ||||||||||||||
| Net income from continuing operations | 9,706 | 11,435 | 13,160 | 13,620 | 16,348 | ||||||||||||||
| Net income (loss) from discontinued operations | 0 | (816 | ) | (427 | ) | 516 | 0 | ||||||||||||
| Net income | 9,706 | 10,619 | 12,733 | 14,136 | 16,348 | ||||||||||||||
(1) | In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities, and as a consequence, we revised our income tax expense for periods beginning in 2008 through the first quarter of 2015. Please refer to Note 1 and Note 17 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K. |
| Year Ended December 31, | |||||||||||||||||||
2011(1) | 2012(1) | 2013(1) | 2014(1) | 2015 | |||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||||
| Basic net income (loss) per share of Class A and B common stock: | |||||||||||||||||||
| Continuing operations | $ | 15.04 | $ | 17.47 | $ | 19.77 | $ | 20.15 | $ | 23.11 | |||||||||
| Discontinued operations | 0.00 | (1.25 | ) | (0.64 | ) | 0.76 | 0.00 | ||||||||||||
| Basic net income per share of Class A and B common stock | $ | 15.04 | $ | 16.22 | $ | 19.13 | $ | 20.91 | $ | 23.11 | |||||||||
| Basic net income (loss) per share of Class C capital stock: | |||||||||||||||||||
| Continuing operations | $ | 15.04 | $ | 17.47 | $ | 19.77 | $ | 20.15 | $ | 24.63 | |||||||||
| Discontinued operations | 0.00 | (1.25 | ) | (0.64 | ) | 0.76 | 0.00 | ||||||||||||
| Basic net income per share of Class C capital stock | $ | 15.04 | $ | 16.22 | $ | 19.13 | $ | 20.91 | $ | 24.63 | |||||||||
| Diluted net income (loss) per share of Class A and B common stock: | |||||||||||||||||||
| Continuing operations | $ | 14.83 | $ | 17.21 | $ | 19.42 | $ | 19.82 | $ | 22.84 | |||||||||
| Discontinued operations | 0.00 | (1.23 | ) | (0.63 | ) | 0.75 | 0.00 | ||||||||||||
| Diluted net income per share of Class A and B common stock | $ | 14.83 | $ | 15.98 | $ | 18.79 | $ | 20.57 | $ | 22.84 | |||||||||
| Diluted net income (loss) per share of Class C capital stock: | |||||||||||||||||||
| Continuing operations | $ | 14.83 | $ | 17.21 | $ | 19.42 | $ | 19.82 | $ | 24.34 | |||||||||
| Discontinued operations | 0.00 | (1.23 | ) | (0.63 | ) | 0.75 | 0.00 | ||||||||||||
| Diluted net income per share of Class C capital stock | $ | 14.83 | $ | 15.98 | $ | 18.79 | $ | 20.57 | $ | 24.34 | |||||||||
(1) | In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities, and as a consequence, we revised our income tax expense for periods beginning in 2008 through the first quarter of 2015. Please refer to Note 1 and Note 17 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K |
| Alphabet Inc. and Google Inc. | |
| As of December 31, | |||||||||||||||||||
2011(1)(2) | 2012(1)(2) | 2013(1)(2) | 2014(1)(2) | 2015 | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||||||
| Cash, cash equivalents, and marketable securities | $ | 44,626 | $ | 48,088 | $ | 58,717 | $ | 64,395 | $ | 73,066 | |||||||||
| Total assets | 72,359 | 92,711 | 109,050 | 129,187 | 147,461 | ||||||||||||||
| Total long-term liabilities | 5,294 | 6,662 | 6,165 | 8,548 | 7,820 | ||||||||||||||
| Total stockholders’ equity | 58,118 | 71,570 | 86,977 | 103,860 | 120,331 | ||||||||||||||
(1) | In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities, and as a consequence, we revised our income tax expense for periods beginning in 2008 through the first quarter of 2015. Please refer to Note 1 and Note 17 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K. |
(2) | Includes reclassifications of deferred tax assets and liabilities related to ASU 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” Please refer to Note 1 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K. |
Overview
Google is a global technology leader focused on improving the ways people connect with information. We aspire to build products and provide services that improve the lives of billions of people globally. Our mission is to organize the world’s information and make it universally accessible and useful. Our innovations in web search and advertising have made our website a top internet property and our brand one of the most recognized in the world.
Our Motorola business is comprised of two operating segments. The Mobile segment is focused on mobile wireless devices and related products and services. The Home segment is focused on technologies and devices that provide video entertainment services to consumers by enabling subscribers to access a variety of interactive digital television services.
We generate revenue primarily by delivering relevant, cost-effective online advertising. Businesses use our AdWords program to promote their products and services with targeted advertising. In addition, the third parties that comprise the Google Network use our AdSense program to deliver relevant ads that generate revenues and enhance the user experience. We also generate revenues from Motorola by selling hardware products.
In December 2012, we entered into an agreement with Arris and certain other persons providing for the disposition of our Motorola Home segment. The transaction is expected to close in 2013.
Advertising transactionsBusiness
| Alphabet Inc. and Google Inc. | |
| Alphabet Inc. and Google Inc. | |
| Year Ended December 31, | ||||||||
2013(1)(2) | 2014(1)(2) | 2015 | ||||||
| Consolidated Statements of Income Data: | ||||||||
| Revenues | 100.0 | % | 100.0 | % | 100.0 | % | ||
| Costs and expenses: | ||||||||
| Cost of revenues | 39.6 | 38.9 | 37.6 | |||||
| Research and development | 12.9 | 14.9 | 16.3 | |||||
| Sales and marketing | 11.8 | 12.3 | 12.1 | |||||
| General and administrative | 8.0 | 8.9 | 8.2 | |||||
| Total costs and expenses | 72.3 | % | 75.0 | % | 74.2 | % | ||
| Income from operations | 27.7 | 25.0 | 25.8 | |||||
| Other income (expense), net | 0.9 | 1.1 | 0.4 | |||||
| Income from continuing operations before income taxes | 28.6 | 26.1 | 26.2 | |||||
| Provision for income taxes | 4.9 | 5.5 | 4.4 | |||||
| Net income from continuing operations | 23.7 | 20.6 | 21.8 | |||||
| Net income (loss) from discontinued operations | (0.8 | ) | 0.8 | 0.0 | ||||
| Net income | 22.9 | % | 21.4 | % | 21.8 | % | ||
(1) | Financial results of Motorola Home were included in net income (loss) from discontinued operations for the year ended December 31, 2013. Financial results of Motorola Mobile were included in net income (loss) from discontinued operations for the years ended December 31, 2013 and 2014. |
(2) | In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities, and as a consequence, we revised our income tax expense for periods beginning in 2008 through the first quarter of 2015. Please refer to Note 1 and Note 17 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K. |
| Alphabet Inc. and Google Inc. | |
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| Google segment | |||||||||||
| Google websites | $ | 37,422 | $ | 45,085 | $ | 52,357 | |||||
Google Network Members' websites (1) | 13,650 | 14,539 | 15,033 | ||||||||
| Google advertising revenues | 51,072 | 59,624 | 67,390 | ||||||||
Google other revenues (1) | 4,435 | 6,050 | 7,151 | ||||||||
| Google segment revenues | $ | 55,507 | $ | 65,674 | $ | 74,541 | |||||
| Other Bets | |||||||||||
| Other Bets revenues | $ | 12 | $ | 327 | $ | 448 | |||||
| Consolidated revenues | $ | 55,519 | $ | 66,001 | $ | 74,989 | |||||
(1) | Prior period amounts have been adjusted to reflect the reclassification primarily related to DoubleClick ad serving software revenues from Google other revenues to Advertising Revenues from Google Network Members' websites to conform with the current period presentation. |
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| Google segment revenues | $ | 55,507 | $ | 65,674 | $ | 74,541 | |||||
| Google segment revenues as a percentage of consolidated revenues | 100.0 | % | 99.5 | % | 99.4 | % | |||||
| Aggregate paid clicks change | 20 | % | 22 | % | |||||||
| Aggregate cost-per-click change | (5 | )% | (11 | )% | |||||||
| Alphabet Inc. and Google Inc. | |
Mobile search queries and mobile commerce are growing dramatically around the world, and consumers are using multiple devices to access information. Over time these trends have resulted innew business strategies, changes in our product mix, including a significant increase in mobile search queries and a decelerationshifts in the growthgeographic mix of desktop queries.our revenues. We also expect that our revenue growth rate will continue to be affected by evolving consumeruser preferences, as well as by advertising trends, the acceptance by mobile users of our products and services andas they are delivered on diverse devices, our ability to create a seamless experience for both users and advertisers, and movements in foreign currency exchange rates.
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| Google websites | $ | 37,422 | $ | 45,085 | $ | 52,357 | |||||
| Google websites as a percentage of Google segment revenues | 67.4 | % | 68.6 | % | 70.2 | % | |||||
| Paid clicks change | 29 | % | 33 | % | |||||||
| Cost-per-click change | (7 | )% | (15 | )% | |||||||
Google segment revenues. Our Google websites revenue growth was primarily driven by increases in mobile search due to ongoing improvements in ad formats, as well as growth in YouTube video advertising across TrueView and Google Preferred, partially offset by the general strengthening of the U.S. dollar compared to certain foreign currencies.
| Alphabet Inc. and Google Inc. | |
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
Google Network Members' websites(1) | $ | 13,650 | $ | 14,539 | $ | 15,033 | |||||
Google Network Members' websites revenues as a percentage of Google segment revenues(1) | 24.6 | % | 22.1 | % | 20.2 | % | |||||
| Paid clicks change | 2 | % | (7 | )% | |||||||
| Cost-per-click change | (6 | )% | (3 | )% | |||||||
(1) | Prior period amounts have been adjusted to reflect the reclassification primarily related to DoubleClick ad serving software revenues from Google other revenues to Advertising Revenues from Google Network Members' websites to conform with the current period presentation. |
Both seasonal fluctuations in internet usage and traditional retail seasonality have affected, and are likelyNetwork Members' websites revenues compared to continue to affect, our business. Internet usage generally slows during the summer months, and commercial queries typically increase significantly in the fourth quarterthat of each year. These seasonal trends have caused, and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequentialGoogle websites revenues as well as Google other revenues.
| Alphabet Inc. and Google Inc. | |
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
Google other revenues(1) | $ | 4,435 | $ | 6,050 | $ | 7,151 | |||||
Google other revenues as a percentage of Google segment revenues(1) | 8.0 | % | 9.3 | % | 9.6 | % | |||||
(1) | Prior period amounts have been adjusted to reflect the reclassification primarily related to DoubleClick ad serving software revenues from Google other revenues to Advertising Revenues from Google Network Members' websites to conform with the current period presentation. |
of our sales of digital content products in the Google Play store, primarily apps (revenues which we recognize net of payout to partners). In addition, there was an increase in revenues from service fees received for cloud and apps offerings. These increases were partially offset by the general strengthening of the U.S. dollar compared to certain foreign currencies.
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| Other Bets revenues | $ | 12 | $ | 327 | $ | 448 | |||||
| Other Bets revenues as a percentage of consolidated revenues | 0.0 | % | 0.5 | % | 0.6 | % | |||||
| Alphabet Inc. and Google Inc. | |
| Year Ended December 31, | ||||||||
| 2013 | 2014 | 2015 | ||||||
| United States | 46 | % | 45 | % | 46 | % | ||
| United Kingdom | 10 | % | 10 | % | 10 | % | ||
| Rest of the world | 44 | % | 45 | % | 44 | % | ||
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| United Kingdom revenues | $ | 5,600 | $ | 6,483 | $ | 7,067 | |||||
| Exclude: Foreign exchange impact on current year revenues using prior period rates | 67 | (304 | ) | 538 | |||||||
| Exclude: Hedging gains recognized | (63 | ) | (3 | ) | (133 | ) | |||||
| Constant currency United Kingdom revenues | $ | 5,604 | $ | 6,176 | $ | 7,472 | |||||
| United Kingdom revenue growth rate | 16 | % | 9 | % | |||||||
| United Kingdom constant currency revenue growth rate | 12 | % | 15 | % | |||||||
| Alphabet Inc. and Google Inc. | |
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
Rest of the world revenues(1) | $ | 24,332 | $ | 30,036 | $ | 33,112 | |||||
| Exclude: Foreign exchange impact on current year revenues using prior period rates | 535 | 857 | 5,052 | ||||||||
| Exclude: Hedging gains recognized | (32 | ) | (169 | ) | (1,267 | ) | |||||
| Constant currency Rest of the world revenues | $ | 24,835 | $ | 30,724 | $ | 36,897 | |||||
| Rest of the world revenue growth rate | 23 | % | 10 | % | |||||||
| Rest of the world constant currency revenue growth rate | 26 | % | 24 | % | |||||||
United States revenues(1) | $ | 25,587 | $ | 29,482 | $ | 34,810 | |||||
| United States revenue growth rate | 15 | % | 18 | % | |||||||
| Total consolidated revenues | $ | 55,519 | $ | 66,001 | $ | 74,989 | |||||
| Constant currency total consolidated revenues | $ | 56,026 | $ | 66,382 | $ | 79,179 | |||||
| Total consolidated revenue growth rate | 19 | % | 14 | % | |||||||
| Constant currency total consolidated revenue growth rate | 20 | % | 20 | % | |||||||
(1) | In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities. We revised the classification of such revenues between Rest of the world and U.S. for prior periods. Please refer to Note 1 and Note 17 of the Notes to Consolidated Financial Statements included in Part II of this Annual report t on Form 10-K for further information. |
| Alphabet Inc. and Google Inc. | |
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| Traffic acquisition costs | $ | 12,258 | $ | 13,497 | $ | 14,343 | |||||
| Other cost of revenues | 9,735 | 12,194 | 13,821 | ||||||||
| Total cost of revenues | $ | 21,993 | $ | 25,691 | $ | 28,164 | |||||
| Total cost of revenues as a percentage of revenues | 39.6 | % | 38.9 | % | 37.6 | % | |||||
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| Traffic acquisition costs to Google Network Members | $ | 9,293 | $ | 9,864 | $ | 10,242 | |||||
| Traffic acquisition costs to distribution partners | 2,965 | 3,633 | 4,101 | ||||||||
| Traffic acquisition costs | $ | 12,258 | $ | 13,497 | $ | 14,343 | |||||
| Traffic acquisition costs as a percentage of advertising revenues | 24.0 | % | 22.6 | % | 21.3 | % | |||||
We conduct our Motorola business in highly competitive markets, facing both new and established competitors. The markets for many of our products are characterized by rapidly changing technologies, frequent new product introductions, changing consumer trends, short product life cycles, consumer loyalty and evolving industry standards. Market disruptions caused by new technologies, the entry of new competitors, consolidations among our customers and competitors, changes in regulatory requirements, changes in economic conditions, supply chain interruptions or other factors, can introduce volatility into our businesses. Meeting all of these challenges requires consistent operational planning and execution and investment in technology, resulting in innovative products that meet the needs of our customers around the world.
From an overall business perspective, we continue to invest aggressively in our systems, data centers, corporate facilities, information technology infrastructure, and employees. We increased our hiring in 2012, and we may continue to do so and to provide competitive compensation programs for our employees. Our full-time employee headcount was 32,467 at December 31, 2011 and 53,861 at December 31, 2012, which includes 16,317 headcount from Motorola. Acquisitions will also remain an important component of our strategy and use of capital, and we expect our current pace of acquisitions to continue. We expect our costperiod.
As we expand our advertising programs and other products to international markets, we continue to increase our exposure to fluctuations in foreign currency to U.S. dollar exchange rates. We have a foreign exchange risk management program that is designed to reduce our exposure to fluctuations in foreign currency exchange rates. However, this program will not fully offset the effect of fluctuations on our revenues and earnings.
Results of Operations
We completed our acquisition of Motorola on May 22, 2012 (the acquisition date). The operating results of Motorola were included in our Consolidated Statements of Income from the acquisition date through December 31, 2012. In December 2012, we entered into an agreement for the disposition of the Motorola Home segment and the related financial results are presented as net loss from discontinued operations in the Consolidated Statements of Income.
Subsequent to the acquisition in May 2012, we initiated a restructuring plan in our Motorola business. See Note 9 of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further discussion of this restructuring plan and the associated restructuring charges. We continue to evaluate our plans and further restructuring actions may occur, which may cause us to incur additional restructuring charges, some of which may be significant.
The following table presents our historical operating results as a percentage of revenues for the periods indicated:
| Year Ended December 31, | ||||||||||||
| 2010 | 2011 | 2012 | ||||||||||
Consolidated Statements of Income Data: | ||||||||||||
Revenues: | ||||||||||||
Google (advertising and other) | 100.0 | % | 100.0 | % | 91.8 | % | ||||||
Motorola Mobile (hardware and other) | 0 | 0 | 8.2 | |||||||||
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Total revenues | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
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Costs and expenses: | ||||||||||||
Cost of revenues—Google (advertising and other) | 35.5 | 34.8 | 34.2 | |||||||||
Cost of revenues—Motorola Mobile (hardware and other) | 0 | 0 | 6.9 | |||||||||
Research and development | 12.8 | 13.6 | 13.5 | |||||||||
Sales and marketing | 9.5 | 12.1 | 12.2 | |||||||||
General and administrative | 6.8 | 7.2 | 7.8 | |||||||||
Charge related to the resolution of Department of Justice investigation | 0 | 1.3 | 0 | |||||||||
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Total costs and expenses | 64.6 | 69.0 | 74.6 | |||||||||
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Income from operations | 35.4 | 31.0 | 25.4 | |||||||||
Interest and other income, net | 1.4 | 1.5 | 1.3 | |||||||||
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Income from continuing operations before income taxes | 36.8 | 32.5 | 26.7 | |||||||||
Provision for income taxes | 7.8 | 6.8 | 5.2 | |||||||||
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Net income from continuing operations | 29.0 | 25.7 | 21.5 | |||||||||
Net loss from discontinued operations | 0 | 0 | (0.1 | ) | ||||||||
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| |||||||
Net income | 29.0 | % | 25.7 | % | 21.4 | % | ||||||
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Revenues
The following table presents our revenues, by revenue source, for the periods presented (in millions):
| Year Ended December 31, | ||||||||||||
| 2010 | 2011 | 2012 | ||||||||||
Google: | ||||||||||||
Advertising revenues: | ||||||||||||
Google websites | $ | 19,444 | $ | 26,145 | $ | 31,221 | ||||||
Google Network Members’ websites | 8,792 | 10,386 | 12,465 | |||||||||
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Total advertising revenues | 28,236 | 36,531 | 43,686 | |||||||||
Other revenues | 1,085 | 1,374 | 2,353 | |||||||||
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Total Google revenues (advertising and other) | $ | 29,321 | $ | 37,905 | $ | 46,039 | ||||||
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Total Motorola Mobile revenues (hardware and other) | 0 | 0 | 4,136 | |||||||||
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Total revenues | $ | 29,321 | $ | 37,905 | $ | 50,175 | ||||||
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The following table presents our revenues, by business, as a percentage of total revenues for the periods presented:
| Year Ended December 31, | ||||||||||||
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Google (advertising and other) | 100 | % | 100 | % | 92 | % | ||||||
Motorola Mobile (hardware and other) | 0 | % | 0 | % | 8 | % | ||||||
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Total revenues | 100 | % | 100 | % | 100 | % | ||||||
The following table presents our Google revenues, by revenue source, as a percentage of total Google revenues for the periods presented:
| Year Ended December 31, | ||||||||||||
| 2010 | 2011 | 2012 | ||||||||||
Advertising revenues: | ||||||||||||
Google websites | 66 | % | 69 | % | 68 | % | ||||||
Google Network Members’ websites | 30 | % | 27 | % | 27 | % | ||||||
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Total advertising revenues | 96 | % | 96 | % | 95 | % | ||||||
Google websites as % of advertising revenues | 69 | % | 72 | % | 71 | % | ||||||
Google Network Members’ websites as % of advertising revenues | 31 | % | 28 | % | 29 | % | ||||||
Other revenues | 4 | % | 4 | % | 5 | % | ||||||
Our revenues increased $12,270 million from 2011 to 2012. This increase resulted primarily from an increase in advertising revenues generated by Google websites and Google Network Members’ websites and, to a lesser extent, an increase in other revenues driven by hardware product sales. The increase in advertising revenues for Google websites and Google Network Members’ websites resulted primarily from an increase in the number of paid clicks through our advertising programs, partially offset by a decrease in the average cost-per-click paid by our advertisers. The increase in the number of paid clicks generated through our advertising programs was due to an increase in aggregate traffic including mobile queries, certain monetization improvements including new ad formats, the continued global expansion of our products, advertisers, and user base, as well as an increase in the number of Google Network Members. The decrease in the average cost-per-click paid by our advertisers was driven by various factors, such as the general strengthening of the U.S dollar compared to certain foreign currencies (primarily the Euro), the revenue shift mix between Google websites and Google Network Members’ websites, the changes in platform mix due to traffic growth in mobile devices, where the average cost-per-click is typically lower compared to desktop computers and tablets, and the changes in geographical mix due to traffic growth in emerging markets, where the average cost-per-click is typically lower compared to more mature markets.
In addition, the increase in our revenues from 2011 to 2012 resulted from the inclusion of revenues from our Motorola Mobile business of $4,136 million.
Our revenues increased $8,584 million from 2010 to 2011. This increase resulted primarily from an increase in advertising revenues generated by Google websites and Google Network Members’ websites. The increase in advertising revenues for Google websites and Google Network Members’ websites resulted primarily from an increase in the number of paid clicks through our advertising programs and, to a lesser extent, an increase in the average cost-per-click paid by our advertisers. The increase in the number of paid clicks generated through our advertising programs was due to an increase in aggregate traffic, certain monetization improvements including new ad formats, and the continued global expansion of our products, and our advertiser and user base, as well as an increase in the number of Google Network Members. The increase in the average cost-per-click paid by our advertisers was primarily driven by the increased spending from advertisers and a general weakening of the U.S dollar compared to foreign currencies (primarily the Euro, Japanese yen, and British pound), partially offset by the
changes in geographical mix due to traffic growth in emerging markets, where the average cost-per-click is typically lower, compared to more mature markets. In addition, the increase in advertising revenues for Google Network Members’ websites from 2010 to 2011 was partially offset by the loss of a search partnership and, to a lesser extent, by a search quality improvement made during the first quarter of 2011.
Improvements in our ability to ultimately monetize increased traffic primarily relate to enhancing the end user experience, including providing end users with ads that are more relevant to their search queries or to the content on the Google Network Members’ websites they visit. For instance, these improvements include increasing site links to be full size links with the URL (uniform resource locator), moving a portion of the first line of the ad to the heading to better promote the content of the ad, providing an option to preview the ad, and moving the ad’s URL to a separate line below the heading for greater page format consistency.
Aggregate paid clicks on Google websites and Google Network Members’ websites increased approximately 34% from 2011 to 2012 and approximately 25% from 2010 to 2011. Average cost-per-click on Google websites and Google Network Members’ websites decreased approximately 12% from 2011 to 2012 and increased approximately 3% from 2010 to 2011. The rate of change in aggregate paid clicks and average cost-per-click, and their correlation with the rate of change in revenues, has fluctuated and may fluctuate in the future because of various factors, including the revenue growth rates on our websites compared to those of our Google Network Members, advertiser competition for keywords, changes in foreign currency exchange rates, seasonality, the fees advertisers are willing to pay based on how they manage their advertising costs, changes in advertising quality or formats, and general economic conditions. In addition, traffic growth in emerging markets compared to more mature markets and across various advertising verticals and channels, including mobile devices, also contributes to these fluctuations. Changes in aggregate paid clicks and average cost-per-click may not be indicative of our performance or advertiser experiences in any specific geographic market, vertical, or industry.
We believe that the increase in the number of paid clicks on Google websites and Google Network Members’ websites is substantially the result of our commitment to improving the relevance and quality of both our search results and the advertisements displayed, which we believe results in a better user experience, which in turn results in more searches, advertisers, and Google Network Members and other partners.
Revenues by Geography
The following table presents our Google domestic and international revenues as a percentage of Google revenues, determined based on the billing addresses of our customers for our Google business:
| Year Ended December 31, | ||||||||||||
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United States | 48 | % | 46 | % | 46 | % | ||||||
United Kingdom | 11 | % | 11 | % | 11 | % | ||||||
Rest of the world | 41 | % | 43 | % | 43 | % | ||||||
The following table presents our consolidated domestic and international revenues as a percentage of consolidated revenues, determined based on the billing addresses of our customers for our Google business, and shipping addresses of our customers for our Motorola Mobile business:
| Year Ended December 31, | ||||||||||||
| 2010 | 2011 | 2012 | ||||||||||
United States | 48 | % | 46 | % | 47 | % | ||||||
United Kingdom | 11 | % | 11 | % | 10 | % | ||||||
Rest of the world | 41 | % | 43 | % | 43 | % | ||||||
The growth in revenues from the United States as a percentage of consolidated revenues from 2011 to 2012 was primarily as a result of the inclusion of Motorola Mobile revenues which were primarily generated in the United States.
The general strengthening of the U.S. dollar relative to certain foreign currencies (primarily the Euro) from 2011 to 2012 had an unfavorable impact on our international revenues. Had foreign exchange rates remained constant in these periods, our revenues from the United Kingdom would have been $68 million or 1.4% higher and our revenues from the rest of the world would have been approximately $1,211 million or 5.6% higher in 2012. This is before consideration of hedging gains of $18 million and $199 million recognized to revenues from the United Kingdom and the rest of the world in 2012.
The general weakening of the U.S. dollar relative to certain foreign currencies (primarily the Euro, Japanese yen, and British pound) from 2010 to 2011 had a favorable impact on our international revenues. Had foreign exchange rates remained constant in these periods, our revenues from the United Kingdom would have been $129 million, or 3.2%, lower and our revenues from the rest of the world would have been approximately $834 million, or 5.1%, lower in 2011. This is before consideration of hedging gains of $9 million and $34 million recognized to revenues from the United Kingdom and the rest of the world in 2011.
Although we expect to continue to make investments in international markets, these investments may not result in an increase in our international revenues as a percentage of total revenues in 2013 or thereafter. See Note 15 of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information about geographic areas.
Costs and Expenses
Cost of Revenues
Cost of revenues consists primarily of traffic acquisition costs. Traffic acquisition costs consist of amounts ultimately paid to our Google Network Members under AdSense arrangements and to certain other partners (our distribution partners) who distribute our toolbar and other products (collectively referred to as access points) or otherwise direct search queries to our website (collectively referred to as distribution arrangements). These amounts are primarily based on the revenue share and fixed fee arrangements with our Google Network Members and distribution partners.
Certain distribution arrangements require us to pay our partners based on a fee per access point delivered and not exclusively—or at all—based on revenue share. These fees are non-refundable. Further, these arrangements are terminable at will, although under the terms of certain contracts we or our distribution partners may be subject to penalties in the event of early termination. We recognize fees under these arrangements over the estimated useful lives of the access points (approximately two years) to the extent we can reasonably estimate those lives and they are longer than one year, or based on any contractual revenue share, if greater. Otherwise, the fees are charged to expense as incurred. The estimated useful life of the access points is based on the historical average period of time they generate traffic and revenues.
Cost of revenues also includes the expenses associated with the operation of our data centers, including depreciation, labor, energy, and bandwidth costs, credit card and other transaction fees related to processing customer transactions, amortization of acquired intangible assets, as well as content acquisition costs. We have entered into arrangements with certain content providers under which we distribute or license their video and other content. In a number of these arrangements, we display ads on the pages of our websites from which the content is viewed and share most of the fees these ads generate with the content providers. We also license content on the pages of our web sites from which the content is sold and share most of the fees these sales generate with content providers. To the extent we are obligated to make guaranteed minimum revenue share payments to our content providers, we recognize as content acquisition costs the contractual revenue share amount or on a straight-line basis, whichever is greater, over the terms of the agreements.
In addition, cost of revenues includes manufacturing and inventory-related costs from our Motorola Mobile business.
The following tables present our cost of revenues and cost of revenues as a percentage of revenues by business, and our traffic acquisition costs, and traffic acquisition costs as a percentage of advertising revenues in the Google business, for the periods presented (dollars in millions):
| Year Ended December 31, | ||||||||||||
| 2010 | 2011 | 2012 | ||||||||||
Cost of revenues—Google (advertising and other) | $ | 10,417 | $ | 13,188 | $ | 17,176 | ||||||
Cost of revenues—Motorola Mobile (hardware and other) | 0 | 0 | 3,458 | |||||||||
Cost of revenues—Google (advertising and other) as a percentage of Google revenues | 35.5 | % | 34.8 | % | 37.3 | % | ||||||
Cost of revenues—Motorola Mobile (hardware and other) as a percentage of Motorola Mobile revenues | 0 | 0 | 83.6 | % | ||||||||
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| 2010 | 2011 | 2012 | ||||||||||
Traffic acquisition costs related to AdSense arrangements | $ | 6,162 | $ | 7,294 | $ | 8,791 | ||||||
Traffic acquisition costs related to distribution arrangements | 1,155 | 1,517 | 2,165 | |||||||||
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Total traffic acquisition costs | $ | 7,317 | $ | 8,811 | $ | 10,956 | ||||||
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Traffic acquisition costs as a percentage of advertising revenues | 25.9 | % | 24.1 | % | 25.1 | % | ||||||
Cost of revenues increased $7,446 million from 2011 to 2012. The increase was primarily related to the inclusion of manufacturing and inventory-related costs from our Motorola Mobile business of $3,458 million. Additionally, there was an increase in traffic acquisition costs of $2,145$846 million, resulting from more advertiser fees generated through our AdSense program driven primarily by an increase in advertising revenues, as well as more fees paid to our distribution partners for additional traffic directed to our websites, as well as more distribution fees paid.websites. Additionally, there was an impairment charge of $378 million recognized in 2014 related to a patent licensing royalty asset acquired in connection with the Motorola acquisition that did not recur in 2015. The remaining increase was primarily driven by increasedecrease in data center costs, hardware product costs and content acquisition costs. The increase inaggregate traffic acquisition costs as a percentage of advertising revenues was primarily thea result of a greatershift of mix from Google Network Members' websites revenue to Google websites revenue.
Cost of revenues increased $2,771 million from 2010 to 2011. The increase was primarily related to an increase in trafficdata center costs, content acquisition costs of $1,132 million resulting from more advertiser fees generated through our AdSense program. The increase was also related to an increase in traffic acquisition costs of $362 million from our distribution arrangements as a result of more traffic directedincreased usage activities related to YouTube and digital content by our websites, as well as more distribution fees paid.users, and revenue share payments to mobile carriers and original equipment manufacturers (OEMs). In addition, the increase was also driven by the impairment charge described above. The decrease in traffic acquisition costs as a percentage of advertising revenues was primarily due to an increase in the proportiona result of advertising revenues from oura shift of mix between Google websites compared to ourrevenue and Google Network Members’Members' websites more revenues realized from Google Network Members to whom we pay less revenue share, and, to a lesser extent, expiration of an AdSense arrangement under which we paid guaranteed minimum revenue share. In addition, there was an increase in data center costs of $784 million, primarily resulting from the depreciation of additional information technology assets and data center buildings and an increase in labor, energy, and bandwidth costs, and an increase in content acquisition costs of $236 million, primarily related to content displayed on YouTube, partially offset by a decrease in mobile phone costs.
revenue.
The relative growth rates of revenues from ourGoogle websites and from our Google Network Members’ websites.
The growth rates of expenses associated with our data center operations, as well as our hardware inventory costs;
Whether we are able to continue to improve the monetization of traffic on ourGoogle websites and our Google Network Members’ websites.
The relative growth rates of expenses associated with distribution arrangements and the related revenues generated, including whether we share with certain existing and new distribution partners, including mobile distribution partners, proportionately more of the aggregate advertising fees that we earn from paid clicks derived from search queries these partners direct to our websites.
Research and development expenses Research and development expenses as a percentage of total revenues Sales and marketing expenses Sales and marketing expenses as a percentage of total revenues In addition, there was an increase in labor and facilities-related costs of $571 million and an increase in stock-based compensation expense of $163 million, both largely resulting from a 15% increase in sales and marketing headcount. periods. General and administrative expenses General and administrative expenses as a percentage of total revenues assets; and $121 million and an increase of $80 million of miscellaneous general and administrative expenses. These factors were partially offset by a decrease in professional service fees and expenses of $128 million, primarily due to lower legal-related costs. Stock-based compensation Stock-based compensation as a percentage of total revenues 2015, respectively. Provision for income taxes Effective tax rate We continue to monitor the progress of ongoing discussions with tax authorities and the impact, if any, of the expected expiration of the statute of limitations Revenues Loss from discontinued operations before income taxes Provision for income taxes Net loss from discontinued operations Consolidated Statements of Income Data: Revenues: Google (advertising and other) Motorola Mobile (hardware and other) Total revenues Costs and expenses: Cost of revenues—Google (advertising and other) Cost of revenues—Motorola Mobile (hardware and other) Research and development Sales and marketing General and administrative Charge related to the resolution of Department of Justice investigation Total costs and expenses Income from operations Interest and other income (expense), net Income from continuing operations before income taxes Provision for income taxes Net income from continuing operations Net income (loss) from discontinued operations Net income Net income (loss) per share—basic: Continuing operations Discontinued operations Net income per share—basic Net income (loss) per share—diluted: Continuing operations Discontinued operations Net income per share—diluted Revenues: Google (advertising and other) Motorola Mobile (hardware and other) Total revenues Costs and expenses: Cost of revenues—Google (advertising and other) Cost of revenues—Motorola Mobile (hardware and other) Research and development Sales and marketing General and administrative Charge related to the resolution of Department of Justice investigation Total costs and expenses Income from operations Interest and other income (expense), net Income from continuing operations before income taxes Provision for income taxes Net income from continuing operations Net income (loss) from discontinued operations Net income Net cash provided by operating activities Net cash used in investing activities Net cash provided by financing activities From time to time, we may hold marketable equity securities obtained through acquisitions or strategic investments in private companies that subsequently go public. accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. payments related to debt. Operating lease obligations, net of sublease income amounts Purchase obligations Long-term debt obligations Other long-term liabilities reflected on our balance sheet Total contractual obligations 2015 2015 (in millions): they occur. liabilities are recorded in other income (expense), net, which are offset by the gains and losses on the forward contracts. These changes would have resulted in an adverse impact on income before income taxes of approximately $93 million and $122 million as of December 31, 2014 and December 31, 2015. The adverse impact as of December 31, 2014 and December 31, 2015 is after consideration of the offsetting effect of approximately $948 million and $1.1 billion from foreign exchange contracts in place for the months of December 31, 2014 and December 31, 2015. recorded in other income (expense), net. 2015. Assets Current assets: Cash and cash equivalents Marketable securities Total cash, cash equivalents, and marketable securities (including securities loaned of $2,778 and $3,160) Accounts receivable, net of allowance of $133 and $581 Inventories Receivable under reverse repurchase agreements Deferred income taxes, net Prepaid revenue share, expenses and other assets Total current assets Prepaid revenue share, expenses and other assets, non-current Non-marketable equity securities Property and equipment, net Intangible assets, net Goodwill Total assets Liabilities and Stockholders’ Equity Current liabilities: Accounts payable Short-term debt Accrued compensation and benefits Accrued expenses and other current liabilities Accrued revenue share Securities lending payable Deferred revenue Income taxes payable, net Total current liabilities Long-term debt Deferred revenue, non-current Income taxes payable, non-current Deferred income taxes, net, non-current Other long-term liabilities Commitments and contingencies 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 additional paid-in capital, $0.001 par value per share: 9,000,000 shares authorized (Class A 6,000,000, Class B 3,000,000) and 12,000,000 shares authorized (Class A 9,000,000, Class B 3,000,000); 324,895 (Class A 257,553, Class B 67,342) and par value of $325 (Class A $258, Class B $67) and 329,979 (Class A 267,448, Class B 62,531) and par value of $330 (Class A $267, Class B $63) shares issued and outstanding Class C capital stock, $0.001 par value per share, 3,000,000 shares authorized; no shares issued and outstanding Accumulated other comprehensive income Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity Revenues: Google (advertising and other) Motorola Mobile (hardware and other) Total revenues Costs and expenses: Cost of revenues—Google (advertising and other)(1) Cost of revenues—Motorola Mobile (hardware and other)(1) Research and development(1) Sales and marketing(1) General and administrative(1) Charge related to the resolution of Department of Justice investigation Total costs and expenses Income from operations Interest and other income, net Income from continuing operations before income taxes Provision for income taxes Net income from continuing operations Net loss from discontinued operations Net income Net income (loss) per share of Class A and Class B common stock—basic: Continuing operations Discontinued operations Net income per share of Class A and Class B common stock—basic Net income (loss) per share of Class A and Class B common stock—diluted: Continuing operations Discontinued operations Net income per share of Class A and Class B common stock—diluted (1) Includes stock-based compensation expense as follows: Cost of revenues—Google (advertising and other) Cost of revenues—Motorola Mobile (hardware and other) Research and development Sales and marketing General and administrative Net income Other comprehensive income: Change in foreign currency translation adjustment Available-for-sale investments: Change in net unrealized gains Less: reclassification adjustment for net gains included in net income Net change (net of tax effect of $52, $54, $68) Cash flow hedges: Change in unrealized gains Less: reclassification adjustment for gains included in net income Net change (net of tax effect of $52, $2, $53) Other comprehensive income Comprehensive income Balance at January 1, 2010 Common stock issued Common stock repurchased Stock-based compensation expense Stock-based compensation tax benefits Tax withholding related to vesting of restricted stock units Net income Other comprehensive income Balance at December 31, 2010 Common stock issued Stock-based compensation expense Stock-based compensation tax benefits Tax withholding related to vesting of restricted stock units Net income Other comprehensive income Balance at December 31, 2011 Common stock issued Stock-based compensation expense Stock-based compensation tax benefits Tax withholding related to vesting of restricted stock units Net income Other comprehensive income Balance at December 31, 2012 Operating activities Net income Adjustments: Depreciation and amortization of property and equipment Amortization of intangible and other assets Stock-based compensation expense Excess tax benefits from stock-based award activities Deferred income taxes Impairment of equity investments Gain on divestiture of business Other Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable Income taxes, net Inventories Prepaid revenue share, expenses and 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 Purchases of marketable securities Maturities and sales of marketable securities Investments in non-marketable equity securities Cash collateral related to securities lending Investments in reverse repurchase agreements Acquisitions, net of cash acquired and proceeds received from divestiture, and purchases of intangible and other assets Net cash used in investing activities Financing activities Net proceeds (payments) from stock-based award activities Excess tax benefits from stock-based award activities Repurchase of common stock in connection with acquisitions Proceeds from issuance of debt, net of costs Repayment of debt Net cash provided by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosures of cash flow information Cash paid for interest Cash paid for taxes Non-cash financing activity: Fair value of stock-based awards assumed in connection with acquisitions Google at carryover basis. The consolidated financial statements of Alphabet present comparative information for prior years on a combined basis, as if both Alphabet and Google were under common control for all periods presented. Google: Advertising revenues: Google websites Google Network Members’ websites Total advertising revenues Other revenues Total Google revenues (advertising and other) Motorola Mobile: Total Motorola Mobile revenues (hardware and other) Total revenues We recognize as revenues the fees charged to advertisers each time a user clicks on one of the ads that appears next to the search results or content on customer or when the return period elapsed, as applicable. advance of our performance in the underlying agreement on the accompanying Consolidated Balance Sheets. otherwise direct search queries to our certain intangible assets. method over the requisite service period. Additionally, stock-based compensation for liability classified awards reflect changes in fair value during the requisite service period. respectively. 2013, 2014, or 2015. governments. Investments Investments income tax provision. Basic net income (loss) per share: Numerator Allocation of undistributed earnings—continuing operations Allocation of undistributed earnings—discontinued operations Total Denominator Weighted-average common shares outstanding Number of shares used in per share computation Basic net income (loss) per share Continuing operations Discontinued operations Basic net income per share Diluted net income per share: Numerator Allocation of undistributed earnings for basic computation—continuing operations Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares Reallocation of undistributed earnings to Class B shares Allocation of undistributed earnings—continuing operations Allocation of undistributed earnings for basic computation—discontinued operations Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares Reallocation of undistributed earnings to Class B shares Allocation of undistributed earnings—discontinued operations Denominator Number of shares used in basic computation Weighted-average effect of dilutive securities Add: Conversion of Class B to Class A common shares outstanding Employee stock options, including warrants issued under Transferable Stock Option program Restricted stock units Number of shares used in per share computation Diluted net income (loss) per share: Continuing operations Discontinued operations Diluted net income per share Cash Level 1: Money market and other funds U.S. government notes Marketable equity securities Level 2: Time deposits Money market and other funds(1) U.S. government agencies Foreign government bonds Municipal securities Corporate debt securities Agency residential mortgage-backed securities Total Cash Level 1: Money market and other funds U.S. government notes Marketable equity securities Level 2: Time deposits Money market and other funds(1) U.S. government agencies Foreign government bonds Municipal securities Corporate debt securities Agency residential mortgage-backed securities Asset-backed securities Total The majority of our time deposits are foreign deposits. Due in 1 year Due in 1 year through 5 years Due in 5 years through 10 years Due after 10 years Total Foreign government bonds Corporate debt securities Agency residential mortgage-backed securities Total U.S. government notes Foreign government bonds Municipal securities Corporate debt securities Agency residential mortgage-backed securities Total secured borrowings with significant investment categories as follows (in millions): $192 million. hedged item. 2014 2015. 2015. Balance Sheet Location Derivative Assets: Level 2: Foreign exchange contracts Derivative Liabilities: Level 2: Foreign exchange contracts Balance Sheet Location Derivative Assets: Level 2: Foreign exchange contracts Interest rate contracts Total Derivative Liabilities: Level 2: Foreign exchange contracts Derivatives in Cash Flow Hedging Relationship Foreign exchange contracts Interest rate contracts Total Derivatives in Cash Flow Hedging Relationship Foreign exchange contracts Derivatives in Cash Flow Hedging Relationship Foreign exchange contracts Gains (losses) related to the ineffective portion of the hedges were not material in all periods presented.31Alphabet Inc. and Google Inc. Research and DevelopmentThe following table presents our research and developmentR&D expenses, and research and developmentthose expenses as a percentage of our revenues, for the periods presented (dollars in(in millions): Year Ended December 31, 2010 2011 2012 $ 3,762 $ 5,162 $ 6,793 12.8 % 13.6 % 13.5 % Research and development Year Ended December 31, 2013 2014 2015 Research and development expenses $ 7,137 $ 9,832 $ 12,282 Research and development expenses as a percentage of revenues 12.9 % 14.9 % 16.3 % R&D expenses consist primarily of compensationof:Labor and relatedfacilities-related costs for personnelemployees responsible for the researchR&D of our existing and development of new and existing products and services. We expense researchservices;Depreciation and development costs as incurred.Researchequipment-related expenses; and developmentStock-based compensation expense.R&D expenses increased $1,631$2,450 million and increased as a percentage of revenues from 20112014 to 2012, which includes $7102015. These increases were primarily due to an increase in labor and facilities-related costs of $1,502 million and an increase in stock-based compensation expense of $487 million, both largely as a result of a 16% increase in R&D headcount. The increase in labor and facilities-related costs was also impacted by expenses resulting from project milestones in Other Bets established several years ago. In addition, there was an increase in depreciation and equipment-related expenses of approximately $248 million and an increase in professional services of $174 million due to additional expenses incurred for consulting and outsourced services.R&D expenses increased $2,695 million and increased as a percentage of revenues from 2013 to 2014. These increases were primarily due to an increase in labor and facilities-related costs of $1,289 million and an increase in stock-based compensation expense of $559 million, both largely as a result of a 27% increase in R&D headcount. In addition, there was an increase in depreciation and equipment-related expenses of $425 million and an increase in professional services of $371 million due to additional expenses incurred for consulting and outsourced services.We expect that R&D expenses will increase in dollar amount and may fluctuate as a percentage of revenues in 2016 and future periods.Sales and MarketingThe following table presents our sales and marketing expenses, and those expenses as a percentage of revenues, for the periods presented (in millions): Year Ended December 31, 2013 2014 2015 Sales and marketing expenses $ 6,554 $ 8,131 $ 9,047 Sales and marketing expenses as a percentage of revenues 11.8 % 12.3 % 12.1 % Sales and marketing expenses consist primarily of:Labor and facilities-related costs for our personnel engaged in sales and marketing, sales support, and certain customer service functions;Advertising and promotional expenditures related to Motorola Mobile.our products and services; andStock-based compensation expense.Sales and marketing expenses increased $916 million and remained relatively flat as a percentage of revenues from 2014 to 2015. The remaining increase of $921 millionin dollar amount was primarily due to an increase in labor and facilities-related costs of $359$329 million largely as a result of a 15% increase in research and development headcount, an increase in stock-based compensation expense of $213 million, an increase in depreciation and equipment-related expenses of $147 million, and an increase in professional services expense of $66 million.Research and development expenses increased $1,400 million from 2010 to 2011. This increase was primarily due to an increase in labor and facilities-related costs of $875$184 million, largely asresulting from a result of a 23% increase in research and development headcount, including headcount from acquisitions, as well as an increase in employee base salaries of approximately 10%. In addition, there was an increase in stock-based compensation expense of $200 million.We expect that research and development expenses will increase in dollar amount and may increase as a percentage of total revenues in 2013 and future periods because we expect to continue to invest in building the necessary employee and system infrastructure required to support the development of new, and improve existing, products and services.Sales and MarketingThe following table presents our sales and marketing expenses, and sales and marketing expenses as a percentage of total revenues for the periods presented (dollars in millions): Year Ended December 31, 2010 2011 2012 $ 2,799 $ 4,589 $ 6,143 9.5 % 12.1 % 12.2 % Sales and marketing expenses consist primarily of compensation and related costs for personnel engaged in customer service, sales, and sales support functions, as well as advertising and promotional expenditures.Sales and marketing expenses increased $1,554 million from 2011 to 2012, which includes $678 million related to Motorola Mobile. The remaining increase of $876 million was primarily due to an increase in labor and facilities-related costs of $390 million, largely as a result of a 14%12% increase in sales and marketing headcount, as well as an increase in advertising and promotional expenses of $288 million. In addition, there was an increase in stock-based compensation expense of $87 million.Sales and marketing expenses increased $1,790 million from 2010 to 2011. This increase was primarily due to an increase in labor and facilities-related costs of $787 million, largely as a result of a 36% increase in sales and marketing headcount, including headcount from acquisitions, as well as an increase in employee base salaries of approximately 10%.headcount. In addition, there was an increase in advertising and promotional expenses of $700$184 million and an increase in professional service fees of $158 million due to additional expenses incurred for consulting and outsourced services.Sales and marketing expenses increased $1,577 million from 2013 to 2014 and increased as a percentage of revenues from 2013 to 2014. These increases were primarily due to an increase in advertising and promotional expenses of $614 million.32Alphabet Inc. and Google Inc. We expect that sales and marketing expenses will increase in dollar amount and may increasefluctuate as a percentage of total revenues in 20132016 and future periods, as we expand our business globally, increase advertising and promotional expenditures in connection with new and existing products, and increase the level of service we provide to our advertisers, Google Network Members, and other partners.General and AdministrativeThe following table presents our general and administrative expenses, and general and administrativethose expenses as a percentage of total revenues, for the periods presented (dollars in(in millions): Year Ended December 31, 2010 2011 2012 $ 1,962 $ 2,724 $ 3,845 6.8 % 7.2 % 7.8 % Year Ended December 31, 2013 2014 2015 General and administrative expenses $ 4,432 $ 5,851 $ 6,136 General and administrative expenses as a percentage of revenues 8.0 % 8.9 % 8.2 % General and administrative expenses consist primarily of compensationof:Labor and relatedfacilities-related costs for personnel and facilities, and include costs related toin our facilities, finance, human resources, information technology, and legal organizations,organizations;Depreciation and fees for professional services. equipment-related expenses;Professional services are principally comprised offees primarily related to outside legal, audit, information technology consulting, and outsourcing services. General and administrative expenses also include amortizationservices;Amortization of certain acquired intangible assets.Stock-based compensation expense.General and administrative expenses increased $1,121$285 million and decreased as a percentage of revenues from 20112014 to 2012, which includes $364 million related to Motorola Mobile.2015. The remaining increase of $757 millionin dollar amount was primarily due to an increase in amortization of acquired intangible assets of $274 million, an increase in professional servicesstock-based compensation expense of $147$136 million the majority of which was related to legal costs,and an increase in labor and facilities-related costs of $122$69 million, primarily asboth largely resulting from a result of a 11%15% increase in general and administrative headcount, as well asheadcount. In addition, there was an increase in stock-based compensation expensedepreciation and equipment-related expenses of $89 million.General and administrative expenses increased $762$1,419 million and increased as a percentage of revenues from 20102013 to 2011. This increase was2014. The increases were primarily due to an increase in labor and facilities-related costs of $350$576 million primarily asand an increase in stock-based compensation expense of $260 million, both largely resulting from a result of a 37%24% increase in general and administrative headcount and an increase in employee base salaries of approximately 10%, as well as an increase in expense related to professional services of $260 million, the majority of which were related to consulting services and legal costs.headcount. In addition, there was an increase in stock-based compensationprofessional services related expense of $116 million.As we expand our business$314 million due to higher legal related costs, as well as additional consulting and incur additional expenses, weoutsourced services.We expect general and administrative expenses will increase in dollar amount and may increasefluctuate as a percentage of total revenues in 20132016 and future periods.Charge Related to the Resolution of Department of Justice InvestigationIn connection with a resolution of an investigation by the United States Department of Justice into the use of Google advertising by certain advertisers, we accrued $500 million during the first quarter of 2011, which was paid in August 2011 upon final resolution of that matter.Stock-Based CompensationThe following table presents our equity settled stock-based compensation expense, and equity settled stock-based compensation as a percentage of revenues, as reflected in our consolidated results from continuing operations for the periods presented (dollars in(in millions): Year Ended December 31, 2010 2011 2012 $ 1,376 $ 1,974 $ 2,649 4.7 % 5.2 % 5.3 % Year Ended December 31, 2013 2014 2015 Stock-based compensation $ 3,127 $ 4,175 $ 5,203 Stock-based compensation as a percentage of revenues 5.6 % 6.3 % 6.9% Stock-based compensation related to equity settled awards increased $675$1,028 million from 20112014 to 2012. This increase was2015 and $1,048 million from 2013 to 2014, and increased as a percentage of revenues in both periods. These increases were primarily due to additional stock awards issued to existing and new employees, awards issued in connection with the acquisition of Motorola, and acceleration of certain awards resulting from Motorola restructuring.driven by headcount growth. Additionally, we recognized stock-based compensation expense forassociated with awards ultimately settled in cash of $0 million, $0 million, and $50 million in the Motorola Home segment was included in net loss from discontinued operations.Stock-based compensation increased $598 million from 2010 to 2011. This increase was largely due to additional stock awards issued to existingyears ended December 31, 2013, 2014, and new employees.We estimate equity settled stock-based compensation expense to be approximately $2.5$5.3 billion in 20132016 and $2.7$5.8 billion thereafter.thereafter related to stock awards outstanding as of December 31, 2015. This estimate does not include expenses to be recognized related to employee stockstock-based awards that are granted after December 31, 2012 or non-employee stock awards that have been or may be granted. In addition, to the extent2015. If forfeiture rates are different from what we have anticipated, stock-based compensation related to these awards will be different from our expectations.Interest33Alphabet Inc. and Google Inc. Consolidated Other Income (Expense), NetInterestThe following table presents other income (expense), net, and other income (expense), net, as a percentage of revenues (in millions): Year Ended December 31, 2013 2014 2015 Other income (expense), net $ 496 $ 763 $ 291 Other income (expense), net, as a percentage of revenues 0.9 % 1.1 % 0.4% Other income (expense), net, decreased $472 million from 2014 to 2015. This decrease was primarily related to a writedown of securities received in conjunction with the sale of a business, as well as, reduced gains on non-marketable investments as compared to 2014. These decreases were partially offset by an increase in interest income as a result of increased cash and fixed income investments.Other income (expense), net, increased $42$267 million from 20112013 to 2012.2014. This increase was primarily driven by realized gains on non-marketable equity investments of $159 million and previously-held equity interests of $126 million, as well as a gainloss recognized on divestiture of business of $188 millionbusinesses (other than Motorola Home) in 2012, an impairment charge related to equity investments of $110 million in 2011,2013. These increases were partially offset by an increase in foreign currency exchange loss of $152$23 million and a decrease in interest income of $99$20 million.Interest and other income, net increased $169 million from 2010 to 2011. This increase was primarily driven by an increase in interest income of $233 million due to an increase in our cash and investment balances and higher yields, as well as an increase in net realized gains on sales of available-for-sale investments of $69 million, partially offset by an increase in interest expense of $53 million primarily related to our long-term debt program. In addition, we recorded an impairment charge of $110 million related to certain equity investments during the year ended December 31, 2011.The costs of our foreign exchange hedging activities that we recognized to interest and other income, net, are primarily a function of the notional amount of the option and forward contracts and their related duration, the movement of the foreign exchange rates relative to the strike prices of the contracts, as well asand the volatility of the foreign exchange rates.As we expand our international business, we believe costs related to hedging activities under our foreign exchange risk management program may increase in dollar amount in 20132016 and future periods.Consolidated Provision for Income TaxesThe following table presents our provision for income taxes, and effective tax rate for the periods presented (dollars in(in millions): Year Ended December 31, 2010 2011 2012 $ 2,291 $ 2,589 $ 2,598 21.2 % 21.0 % 19.4 % Year Ended December 31, 2013(1) 2014(1) 2015 Provision for income taxes $ 2,739 $ 3,639 $ 3,303 Effective tax rate 17.2 % 21.1 % 16.8 % (1)In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities, and as a consequence, we revised our income tax expense for periods beginning in 2008 through the first quarter of 2015. Please refer to Note 1 and Note 17 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K. Our provision for income taxes increasedand our effective tax rate decreased from 20112014 to 2012, primarily2015, largely due to a discrete benefit recognized in 2015 as a result of increasesthe resolution of a multi-year audit in federal income taxes, driven by higher taxable income year over yearthe U.S. and expiration of the federal research and development credit, partially offset by proportionately more earnings realized in countries that have lower statutory tax rates.Our provision for income taxes and our effective tax rate decreasedincreased from 20112013 to 2012, primarily as a result of2014, largely due to proportionately more earnings realized in countries that have lowerhigher statutory tax rates as well as a discrete item related to an investigation by the Department of Justiceand more benefit recognized in 2011, which was not deductible for income tax purposes.Our provision for income taxes increased from 20102013 relative to 2011, primarily as a result of increases in federal income taxes, driven by higher taxable income year over year, partially offset by proportionately more earnings realized in countries that have lower statutory tax rates. Our effective tax rate decreased from 2010 to 2011, primarily as a result of proportionately more earnings realized in countries that have lower statutory tax rates, a decrease in state income taxes, and an increase in federal research and development credits recognized in 2011, partially offset by recognition of a charge related2014 due to the resolutionretroactive extension of an investigation by the Department of Justice which is not deductible for tax purposes.The2012 federal research and development credit, expiredoffset by a benefit taken on December 31, 2011. On January 2, 2013, the American Taxpayer Relief Acta valuation allowance release related to a capital loss carryforward in 2014.A reconciliation of 2012 was signed into law. Under this act, the federal research and development credit was retroactively extended for amounts paid or incurred after December 31, 2011 and before January 1, 2014. The effects of these changes in thestatutory income tax law will result in a tax benefit which will be recognized in the first quarter of 2013, which is the quarter in which the law was enacted.Ourrate to our effective tax rate could fluctuate significantlyis set forth in Note 15 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on a quarterly basis andForm 10-K.Our future effective tax rates could be adversely affected to the extentby earnings arebeing lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates. Our effective tax rate could also fluctuate due torates, the net gains and losses recognized by legal entities on certain hedges and related hedged intercompany and other transactions under our foreign exchange risk management program, by changes in the valuation of our deferred tax assets or liabilities, or by changes in tax laws, regulations, or accounting principles, as well as certain discrete items. In addition, weWe are subject to the continuous examination of our income tax returns by the Internal Revenue Service (IRS) and other domestic and foreign tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.34Alphabet Inc. and Google Inc. in various taxing jurisdictions. Further information on these issues, the treatment of undistributed foreign earnings and a reconciliation of the federal statutory income tax rate to our effective tax rate can be found in Notes 11 and 15 of Part II, Item 8 of this Annual Report on Form 10-K.See Critical Accounting Policies and Estimates below for additional information about our provision for income taxes.A reconciliation of the federal statutory income tax rate to our effective tax rate is set forth in Note 14 of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.Net Loss from Discontinued OperationsIn December 2012, we entered into an agreement with Arris and certain other persons providing for the disposition of the Motorola Home business for total consideration of approximately $2.35 billion in cash and common stock, subject to certain adjustments. The transaction is expected to close in 2013. As a result, thefollowing financial information of Motorola Home was presented as net loss from discontinued operations in the Consolidated Statements of Income. Year Ended
December 31,
2012 (In millions) $ 2,028 (22 ) (29 ) $ (51 ) Quarterly Results of OperationsYou should read theThe following tables presenting our quarterly results of operations should be read in conjunction with the consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. We have prepared the unaudited information on the same basis as our audited consolidated financial statements. You should also keep in mind that ourOur operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year. Please note that previously reported quarters have been adjusted to show discontinued operations for the disposition of the Motorola Home business.The following table presents our unaudited quarterly results of operations for the eight quarters ended December 31, 2012.2015. This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for fair presentation of our consolidated financial position and operating results for the quarters presented. Both seasonal fluctuations in internet usage and traditional retail seasonality have affected, and are likely to continue to affect, our business. Internet usage generally slows during the summer months, and commercial queries typically increase significantly in the fourth quarter of each year. These seasonal trends have caused, and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates. Quarter Ended Mar 31,
2011 Jun 30,
2011 Sep 30,
2011 Dec 31,
2011 Mar 31,
2012 Jun 30,
2012 Sep 30,
2012 Dec 31,
2012 (In millions, except per share amounts) (unaudited) $ 8,575 $ 9,026 $ 9,720 $ 10,584 $ 10,645 $ 10,964 $ 11,526 $ 12,905 0 0 0 0 0 843 1,778 1,514 8,575 9,026 9,720 10,584 10,645 11,807 13,304 14,419 2,936 3,172 3,378 3,702 3,789 3,984 4,440 4,963 0 0 0 0 0 693 1,515 1,250 1,226 1,234 1,404 1,298 1,441 1,538 1,879 1,935 1,026 1,091 1,204 1,268 1,269 1,413 1,710 1,751 591 648 676 809 757 942 1,020 1,126 500 0 0 0 0 0 0 0 6,279 6,145 6,662 7,077 7,256 8,570 10,564 11,025 2,296 2,881 3,058 3,507 3,389 3,237 2,740 3,394 96 204 302 (18 ) 156 253 65 152 2,392 3,085 3,360 3,489 3,545 3,490 2,805 3,546 594 580 631 784 655 657 647 639 $ 1,798 $ 2,505 $ 2,729 $ 2,705 $ 2,890 $ 2,833 $ 2,158 $ 2,907 0 0 0 0 0 (48 ) 18 (21 ) $ 1,798 $ 2,505 $ 2,729 $ 2,705 $ 2,890 $ 2,785 $ 2,176 $ 2,886 $ 5.59 $ 7.77 $ 8.44 $ 8.34 $ 8.88 $ 8.68 $ 6.59 $ 8.83 0 0 0 0 0 (0.14 ) 0.05 $ (0.06 ) $ 5.59 $ 7.77 $ 8.44 $ 8.34 $ 8.88 $ 8.54 $ 6.64 $ 8.77 $ 5.51 $ 7.68 $ 8.33 $ 8.22 $ 8.75 $ 8.56 $ 6.48 $ 8.68 0 0 0 0 0 (0.14 ) 0.05 (0.06 ) $ 5.51 $ 7.68 $ 8.33 $ 8.22 $ 8.75 $ 8.42 $ 6.53 $ 8.62 Quarter Ended Mar 31,
2014(1) Jun 30,
2014(1) Sep 30,
2014(1) Dec 31,
2014(1) Mar 31,
2015(1) Jun 30,
2015 Sep 30,
2015 Dec 31,
2015 (In millions, except per share amounts) (unaudited) Consolidated Statements of Income Data: Revenues $ 15,420 $ 15,955 $ 16,523 $ 18,103 $ 17,258 $ 17,727 $ 18,675 $ 21,329 Costs and expenses: Cost of revenues 5,961 6,114 6,695 6,921 6,356 6,583 7,037 8,188 Research and development 2,126 2,238 2,655 2,813 2,753 2,789 3,230 3,510 Sales and marketing 1,729 1,941 2,084 2,377 2,065 2,080 2,223 2,679 General and administrative 1,489 1,404 1,365 1,593 1,637 1,450 1,477 1,572 Total costs and expenses 11,305 11,697 12,799 13,704 12,811 12,902 13,967 15,949 Income from operations 4,115 4,258 3,724 4,399 4,447 4,825 4,708 5,380 Other income (expense), net 357 145 133 128 157 131 183 (180 ) Income from continuing operations before income taxes 4,472 4,403 3,857 4,527 4,604 4,956 4,891 5,200 Provision for income taxes 903 984 933 819 1,089 1,025 912 277 Net income from continuing operations $ 3,569 $ 3,419 $ 2,924 $ 3,708 $ 3,515 $ 3,931 $ 3,979 $ 4,923 Net income (loss) from discontinued operations (198 ) (68 ) (185 ) 967 0 0 0 0 Net income $ 3,371 $ 3,351 $ 2,739 $ 4,675 $ 3,515 $ 3,931 $ 3,979 $ 4,923 Less: Adjustment Payment to Class C capital stockholders 0 0 0 0 0 522 0 0 Net income available to all stockholders $ 3,371 $ 3,351 $ 2,739 $ 4,675 $ 3,515 $ 3,409 $ 3,979 $ 4,923 (1)In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities, and as a consequence, we revised our income tax expense for periods beginning in 2008 through the first quarter of 2015. Please refer to Note 1 and Note 17 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K. 35Alphabet Inc. and Google Inc. The basic and diluted income per share data as included on the consolidated statements of income of Alphabet Inc. were as follows for the periods presented (not required for Google pursuant to Rule 12g-3(a)): Quarter Ended Mar 31,
2014(1) Jun 30,
2014(1) Sep 30,
2014(1) Dec 31,
2014(1) Mar 31,
2015(1) Jun 30,
2015 Sep 30,
2015 Dec 31,
2015 (unaudited) Basic net income (loss) per share of Class A and B common stock: Continuing operations $ 5.30 $ 5.06 $ 4.32 $ 5.46 $ 5.16 $ 4.99 $ 5.80 $ 7.16 Discontinued operations (0.29 ) (0.10 ) (0.27 ) 1.43 0.00 0.00 0.00 0.00 Basic net income per share of Class A and B common stock $ 5.01 $ 4.96 $ 4.05 $ 6.89 $ 5.16 $ 4.99 $ 5.80 $ 7.16 Basic net income (loss) per share of Class C capital stock: Continuing operations $ 5.30 $ 5.06 $ 4.32 $ 5.46 $ 5.16 $ 6.51 $ 5.80 $ 7.16 Discontinued operations (0.29 ) (0.10 ) (0.27 ) 1.43 0.00 0.00 0.00 0.00 Basic net income per share of Class C capital stock $ 5.01 $ 4.96 $ 4.05 $ 6.89 $ 5.16 $ 6.51 $ 5.80 $ 7.16 Diluted net income (loss) per share of Class A and B common stock: Continuing operations $ 5.21 $ 4.98 $ 4.25 $ 5.38 $ 5.10 $ 4.93 $ 5.73 $ 7.06 Discontinued operations (0.29 ) (0.10 ) (0.27 ) 1.41 0.00 0.00 0.00 0.00 Diluted net income per share of Class A and B common stock $ 4.92 $ 4.88 $ 3.98 $ 6.79 $ 5.10 $ 4.93 $ 5.73 $ 7.06 Diluted net income (loss) per share of Class C capital stock: Continuing operations $ 5.21 $ 4.98 $ 4.25 $ 5.38 $ 5.10 $ 6.43 $ 5.73 $ 7.06 Discontinued operations (0.29 ) (0.10 ) (0.27 ) 1.41 0.00 0.00 0.00 0.00 Diluted net income per share of Class C capital stock $ 4.92 $ 4.88 $ 3.98 $ 6.79 $ 5.10 $ 6.43 $ 5.73 $ 7.06 (1)In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities, and as a consequence, we revised our income tax expense for periods beginning in 2008 through the first quarter of 2015. Please refer to Note 1 and Note 17 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K. 36Alphabet Inc. and Google Inc. The following table presents our unaudited quarterly results of operations as a percentage of revenues for the eight quarters ended December 31, 2012: Quarter Ended Mar 31,
2011 Jun 30,
2011 Sep 30,
2011 Dec 31,
2011 Mar 31,
2012 Jun 30,
2012 Sep 30,
2012 Dec 31,
2012 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 92.9 % 86.6 % 89.5 % 0 0 0 0 0 7.1 13.4 10.5 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 34.2 35.1 34.8 35.0 35.6 33.7 33.4 34.4 0 0 0 0 0 5.9 11.3 8.7 14.3 13.7 14.4 12.3 13.5 13.0 14.1 13.4 12.0 12.1 12.4 12.0 11.9 12.0 12.9 12.2 6.9 7.2 6.9 7.6 7.2 8.0 7.7 7.8 5.8 0 0 0 0 0 0 0 73.2 68.1 68.5 66.9 68.2 72.6 79.4 76.5 26.8 31.9 31.5 33.1 31.8 27.4 20.6 23.5 1.1 2.3 3.1 (0.1 ) 1.5 2.1 0.5 1.1 27.9 34.2 34.6 33.0 33.3 29.5 21.1 24.6 6.9 6.4 6.5 7.4 6.2 5.5 4.9 4.4 21.0 % 27.8 % 28.1 % 25.6 % 27.1 % 24.0 % 16.2 % 20.2 % 0 % 0 % 0 % 0 % 0 % (0.4 %) 0.1 % (0.2 %) 21.0 % 27.8 % 28.1 % 25.6 % 27.1 % 23.6 % 16.3 % 20.0 % Liquidity2015: Quarter Ended Mar 31,
2014(1) Jun 30,
2014(1) Sep 30,
2014(1) Dec 31,
2014(1) Mar 31,
2015(1) Jun 30,
2015 Sep 30,
2015 Dec 31,
2015 (unaudited) Revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses: Cost of revenues 38.7 38.3 40.5 38.2 36.8 37.1 37.7 38.4 Research and development 13.8 14.0 16.1 15.5 16.0 15.7 17.3 16.4 Sales and marketing 11.2 12.2 12.6 13.1 12.0 11.8 11.9 12.6 General and administrative 9.6 8.8 8.3 8.9 9.4 8.2 7.9 7.4 Total costs and expenses 73.3 73.3 77.5 75.7 74.2 72.8 74.8 74.8 Income from operations 26.7 26.7 22.5 24.3 25.8 27.2 25.2 25.2 Other income (expense), net 2.3 0.9 0.8 0.7 0.9 0.8 1.0 (0.8 ) Income from continuing operations before income taxes 29.0 27.6 23.3 25.0 26.7 28.0 26.2 24.4 Provision for income taxes 5.8 6.2 5.6 4.5 6.3 5.8 4.9 1.3 Net income from continuing operations 23.2 21.4 17.7 20.5 20.4 22.2 21.3 23.1 Net income (loss) from discontinued operations (1.3 ) (0.4 ) (1.1 ) 5.3 0.0 0.0 0.0 0.0 Net income 21.9 % 21.0 % 16.6 % 25.8 % 20.4 % 22.2 % 21.3 % 23.1 % Less: Adjustment Payment to Class C capital stockholders 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 2.9 % 0.0 % 0.0 % Net income available to all stockholders 21.9 % 21.0 % 16.6 % 25.8 % 20.4 % 19.2 % 21.3 % 23.1 % (1)In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities, and as a consequence, we revised our income tax expense for periods beginning in 2008 through the first quarter of 2015. Please refer to Note 1 and Note 17 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K. Capital Resources and Capital ResourcesIn summary, our cash flows are as follows (in millions): Year Ended December 31, 2010 2011 2012 $ 11,081 $ 14,565 $ 16,619 (10,680 ) (19,041 ) (13,056 ) 3,050 807 1,229 At LiquidityAs of December 31, 2012,2015, we had $48.1$73.1 billion of cash, cash equivalents, and marketable securities. Cash equivalents and marketable securities areare comprised of time deposits, money market and other funds, including cash collateral received related to our securities lending program, fixed-income bond funds, highly liquid debt instruments of the U.S. government and its agencies, debt instruments issued by foreign governments, anddebt instruments issued by municipalities in the U.S., corporate debt securities, agency mortgage-backed securities, and asset-backed securities.As of December 31, 2012, $31.42015, $42.9 billion of the $48.1$73.1 billion of cash, cash equivalents, and marketable securities was held by our foreign subsidiaries. If these funds arewere needed for our operations in the U.S., we would be required toOur principal sources of liquidity are our cash, cash equivalents, and marketable securities, as well as the cash flow that we generate from our operations. AtAs of December 31, 2012,2015, we had unused letters of credit forof approximately $89$752 million. We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements through at least the next 12 months. Our liquidity could be negatively affected by a decrease in demand for our products and services. In addition, we may make acquisitions, increase our capital expenditures, or license products and technologies complementary to our business and may need to raise additional capital through future37Alphabet Inc. and Google Inc. debt or equity financing to provide for greater flexibility to fund any such acquisitions and licensingthese activities. Additional financing may not be available at all or on terms favorable to us.We have a debt financing program of up to $3.0 billion through the issuance of commercial paper. Net proceeds from this program are used for general corporate purposes. As of December 31, 2012,2015, we had $2.5$2.0 billion of commercial paper outstanding recorded as short-term debt, with a weighted-average interest rate of 0.2% that maturematures at various dates through 2013. Average commercial paper borrowings during the year were $2.2 billion and the maximum amount outstanding during the year was $2.7 billion.February 2016. In conjunction with this program, we have a $3.0 billion revolving credit facility expiring in July 2016. The interest rate for the credit facility is determined based on a formula using certain market rates. As of December 31, 2012,2015, we were in compliance with the financial covenant in the credit facility and no amounts were outstanding.We intend to align our capital structure so that debt is held at the holding company level. In January 2016, the board of directors of Alphabet authorized the company to issue up to $5.0 billion of commercial paper from time to time and to enter into a $4.0 billion revolving credit facility to replace Google's existing $3.0 billion revolving credit facility. In May 2011, we issued $3.0 billion of unsecured senior notes (2011 Notes) in three equal tranches, due in 2014, 2016, and 2021, with stated interest rates of 1.25%, 2.125%, and 3.625%.2021. The net proceeds from the sale of the notes2011 Notes were used to repay a portion of our outstanding commercial paper and for general corporate purposes. In February 2014, we issued $1.0 billion of unsecured senior notes (2014 Notes) due in 2024, which was used to repay $1.0 billion of the first tranche of our 2011 Notes that matured in May 2014 and for general corporate purposes.As of December 31, 2012,2015, the outstanding notes had a total carrying value of $3.0 billion and a total estimated fair value of these notes were $3.0 billion and $3.2$3.1 billion. The estimated fair value was based on quoted prices for our publicly-traded debt as of December 31, 2012. We are not subject to any financial covenants under the notes.In August 2013, we entered into a $258 million capital lease obligation on certain property expiring in 2028. We intend to exercise the option to purchase the property in 2016. The effective rate of the capital lease obligation approximates the market rate.In October 2015, the board of directors of Alphabet authorized the company to repurchase up to $5,099,019,513.59 of its Class C capital stock, commencing in the fourth quarter of 2015. The repurchases are being executed from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated transactions, including through the use of 10b5-1 plans. The repurchase program does not have an expiration date. As of December 31, 2015, Alphabet repurchased and subsequently retired $1.8 billion of its Class C capital stock. Alphabet's share repurchases in the year ended December 31, 2015 were funded by Google via a return of capital to Alphabet. In January 2016, the board of directors of Alphabet authorized the company to repurchase an additional amount of approximately 514 thousand shares.For 2013, 2014 and 2015, our cash flows were as follows (in millions): Year Ended December 31, 2013 2014 2015 Net cash provided by operating activities $ 18,659 $ 22,376 $ 26,024 Net cash used in investing activities (13,679 ) (21,055 ) (23,711 ) Net cash used in financing activities (857 ) (1,439 ) (3,677 ) Cash Provided by Operating ActivitiesCashOur largest source of cash provided by our operations is advertising revenues generated by Google websites and Google Network Members' websites. Additionally, we generate cash through sales of apps and digital content, hardware products, licensing arrangements, and service fees received for cloud and apps and our Maps API. Prior to its divestiture in October 2014, we also generated cash from sales of hardware products related to the Motorola Mobile business.Our primary uses of cash from our operating activities include payments to our Google Network Members and distribution partners, and payments for content acquisition costs. Prior to the sale of the Motorola Mobile business, our use of cash also included payment for manufacturing and inventory-related costs in the Motorola Mobile business. In addition, uses of cash from operating activities include compensation and related costs, other general corporate expenditures, and income taxes.Net cash provided by operating activities consist ofincreased from 2014 to 2015 primarily due to increased net income adjusted for certain non-cash items, including amortization, depreciation deferred income taxes, excess tax benefits from stock-based award activities,and stock-based compensation expense, as well as the effectand loss on sales of marketable and non-marketable securities. This is partially offset by a net decrease in cash from changes in working capital and other activities.Cashcapital.38Alphabet Inc. and Google Inc. Net cash provided by operating activities in 2012 was $16,619 million and consisted ofincreased from 2013 to 2014 primarily due to increased net income adjusted for depreciation and loss on disposal of $10,737 million, adjustments for non-cash items of $5,172 million,property and equipment and stock-based compensation expense, and a gain on divestiture of business of $188 million andnet increase in cash from changes in working capital and other activities of $898 million. Adjustments for non-cash items primarily consisted of $2,692 million of stock-based compensation expense, $1,988 million of depreciation and amortization expense on property and equipment, $974 million of amortization of intangible and other assets, and $188 million of excess tax benefits from stock-based award activities, partially offsetdriven by $266 million of deferred income taxes. In addition, the increase in cash from changes in working capital activities primarily consisted of an increase in income taxes, net, of $1,492 million including additional tax obligations accrued, partially offset by an increase in the amount of estimated income taxes we paid during the year, an increase in accrued expenses and other liabilities of $762 million, a decrease in inventories of $301 million, an increase accrued revenue share of $299 million, and an increase in deferred revenue of $163 million. These changes were partially offset by an increase in prepaid revenue share, expenses, and other assetsassets.Cash Used in Investing ActivitiesCash provided by or used in investing activities primarily consists of $833 million including prepayments for certain content arrangements, an increasepurchases of accounts receivableproperty and equipment, purchases, maturities, and sales of $787 millionmarketable securities in our investment portfolio, investments in reverse repurchase agreements and the cash collateral received or returned from our securities lending program, as well as acquisitions and divestitures of businesses and intangible assets.Cash used in investing activities increased from 2014 to 2015 primarily due to growthnet increases in fees billedpurchases of marketable securities, activities related to our customers,security lending and purchases of non-marketable investments. This increase was partially offset by lower spend related to acquisitions, lower investments in reverse repurchase agreements, and a decrease in accounts payable of $499 millioncapital expenditures related to our production equipment, data centers, and real estate purchases.Cash used in investing activities increased from 2013 to 2014 primarily due to the timing of invoice processing and payments.Cash provided by operating activitiesincreases in 2011 was $14,565 million and consisted of net income of $9,737 million, adjustments for non-cash items of $4,198 million, and increase in cash from changes in working capital and other activities of $630 million. Adjustments for non-cash items primarily consisted of $1,974 million of stock-based compensation expense, $1,396 million of depreciation and amortization expense of property and equipment, $455 million of amortization of intangible and other assets, $343 million of deferred income taxes, and $110millionexpenditures related to impairmentour production equipment, data centers, and real estate purchases, higher spend related to acquisitions, and lower proceeds received in 2014 from divestiture of equity investments. In addition, thebusinesses compared to 2013. This increase in cash from changes in working capital activities primarily consisted of an increase in accrued expenses and other liabilities of $795 million, a net increase in income taxes payable and deferred income taxes of $731 million, an increase in accrued revenue share of $259 million, an increase of $162 million in deferred revenue, and an increase of $101 million in accounts payable. These increases werewas partially offset by an increasea net decrease in accounts receivablepurchases of $1,156 million due to the growthmarketable securities.Cash Used in fees billed to our advertisers, and an increaseFinancing ActivitiesCash used in prepaid revenue share, expenses and other assets of $262 million. The increase in income taxes payable and deferred income taxes reflectedfinancing activities consists primarily additional tax obligations accrued, partially offset by estimated income taxes paid during 2011. In addition, we paid $500 million related to the resolution of a Department of Justice investigation during the year.Cash provided by operating activities in 2010 was $11,081 million, and consisted of net incomeproceeds or payments from issuance or repayments of $8,505 million, adjustments for non-cash itemsdebt, repurchases of $2,675 million,capital stock, and decrease in cash from changes in working capitalnet proceeds or payments and other activities of $99 million. Adjustments for non-cash items primarily consisted of $1,376 million of stock-based compensation expense, $1,067 million of depreciation and amortization expense on property and equipment, and $329 million of amortization of intangible and other assets, partially offset by $94 million of excess tax benefits from stock-based award activities.In addition,Alphabet, cash used in financing activities increased from 2014 to 2015 primarily driven by the decrease in cash from changes in workingrepurchases of capital activities primarily consisted of an increase of $1,129 million in accounts receivable due to the growth in fees billed to our advertisersstock and an increase of $414 million in prepaid revenue share, expenses and other assets. These increases were partially offset by an increase in accrued expenses and other liabilities of $745 million, an increase in accounts payable of $272 million, an increase in accrued revenue share of $214 million, an increase in deferred revenue of $111 million, and a net increase in income tax payable and deferred income taxes of $102 million, which includes the same $94 million of excess tax benefits frompayments related to stock-based award activities included under adjustments for non-cash items. The increase in accrued expense and other liabilities, accounts payable, accrued revenue share, and deferred revenues are primarily a result of the growth in our business and headcount. The increase in net income taxes payable and deferred income taxes was primarily a result of additional tax obligations accrued, partially offset by the release of certain tax reserves as a result of the settlement of our tax audits for our 2005 and 2006 tax years.As we expand our business internationally, we have offered payment terms to certain advertisers that are standard in their locales but longer than terms we would generally offer to our domestic advertisers.activities. In addition, we continue to evaluate our Motorola restructuring plan, and may incur additional charges, some of which may be significant. This may increase our working capital requirements and may have a negative effect on cash provided by our operating activities.Cash Used In Investing ActivitiesCash used in investing activities in 2012 of $13,056 million was primarily attributable toGoogle, cash used in acquisitions and other investments of $11,264 million, including $9,518 million net cash paid in connection with the acquisition of Motorola, and capital expenditures of $3,273 million related primarily to our facilities, data centers, and related equipment. These decreases were partially offset by net maturities and sales of marketable securities of $1,770 million. Also, in connection with our securities lending program, we returned cash collateral of $334 million. See Note 3 of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further information about our securities lending program.Cash used in investing activities in 2011 of $19,041 million was primarily attributable to net purchases of marketable securities of $12,926 million, capital expenditures of $3,438 million related principally to our facilities, data centers, and related equipment, and cash used in acquisitions and other investments of $2,328 million, including $676 million paid in connection with the acquisition of ITA Software, Inc. Also, in connection with our securities lending program, we returned $354 million of cash collateral.Cash used in investing activities in 2010 of $10,680 million was primarily attributable to net purchases of marketable securities of $6,886 million, capital expenditures of $4,018 million of which $1.8 billion was for thepurchase of an office building in New York City in December 2010, and remaining amounts related principally to our data centers and related equipment, and cash consideration used in acquisitions and other investments of $1,067 million. Also, in connection with our securities lending program, we received $2,361 million of cash collateral which was invested in reverse repurchase agreements.In order to manage expected increases in internet traffic, advertising transactions, and new products and services, and to support our overall global business expansion, we expect to make significant investments in our systems, data centers, corporate facilities, information technology infrastructure, and employees in 2013 and thereafter. However, the amount of our capital expenditures has fluctuated and may continue to fluctuate on a quarterly basis.In addition, we expect to spend a significant amount of cash on acquisitions and other investments from time to time. These acquisitions generally enhance the breadth and depth of our expertise in engineering and other functional areas, our technologies, and our product offerings.In December 2012, we signed an agreement for the disposition of Motorola Home business for total consideration of approximately $2.35 billion in cash and stock subject to certain adjustments. We expect the transaction to close in 2013.Cash Provided by Financing ActivitiesCash provided by financing activities in 2012 of $1,229 million wasincreased from 2014 to 2015 is primarily driven by net proceeds of $1,328 million from short-term debt issued under our commercial paper program and excess tax benefits from stock-based award activities of $188 million. This wascapital transactions with Alphabet, partially offset by net payments forrelated to stock-based award activities.Cash used in financing activities increased from 2013 to 2014 is primarily driven by an increase in net payments related to stock-based award activities, of $287 million.Cash providedoffset partially by financing activitiesa decrease in 2011 of $807 million was primarily driven by net proceeds of $726 million of debt issued and excess tax benefits from stock-based award activities of $86 million.Cash provided by financing activities in 2010 of $3,050 million was primarily driven by $3,463 million of net cash proceeds from the issuance of commercial paper and a promissory note. This was partially offset by $801 million in stock repurchases in connection with our acquisitions of AdMob, Inc. and On2 Technologies, Inc., as well as net proceeds from stock-based award activities of $294 million, and excess tax benefits from stock-based award activities of $94 million.Contractual Obligations as of December 31, 2012 Payments due by period Total Less than
1 year 1-3
years 3-5
years More than
5 years (in millions) $ 3,619 $ 466 $ 870 $ 688 $ 1,595 2,123 942 943 119 119 3,401 70 1,121 1,083 1,127 236 41 119 40 36 $ 9,379 $ 1,519 $ 3,053 $ 1,930 $ 2,877 The above table does not include future rental income of $649 million related to the leases that we assumed in connection withfollowing summarizes our building purchases.Operating LeasesWe have entered into various non-cancelable operating lease agreements for certain of our offices, land, and data centers throughout the world with original lease periods expiring primarily between 2013 and 2063. We are committed to pay a portion of the related operating expenses under certain of these lease agreements. These operating expenses are not included in the above table. Certain of these leases have free or escalating rent payment provisions. We recognize rent expense under such leases on a straight-line basis over the term of the lease. Certain leases have adjustments for market provisions.Purchase ObligationsPurchase obligations represent non-cancelable contractual obligations, at December 31, 2012. These contracts are primarily related to distribution arrangements, video and other content licensing revenue sharing arrangements, data centerexcluding open orders for purchases that support normal operations, and facility build-outs, as well as purchase of inventory.Long-term Debt ObligationsLong-term debt obligations represent principal and interest payments to be made over the life of our unsecured senior notes issued in May 2011. Please see Note 4 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for further details.Other Long-Term LiabilitiesOther long-term liabilities consist of cash obligations, primarily the legal settlement with the Authors Guild and the Association of American Publishers (AAP), asset retirement obligations, and milestone and royalty payments owed in connection with certain acquisitions and licensing agreements.In addition to the amounts above, we had long-term taxes payable of $2.1 billion as of December 31, 2012 related to tax positions for which the timing of the ultimate resolution is uncertain. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes. As a result, this amount is not included in the above table. Payments Due By Period Total Less than1 year 1-3years 3-5years More than5 yearsOperating lease obligations, net of sublease income amounts(1)$ 7,406 $ 646 $ 1,573 $ 1,482 $ 3,705 Purchase obligations(2)1,697 946 298 150 303 Long-term debt obligations, including capital lease obligations(3)3,722 1,306 140 140 2,136 Other long-term liabilities reflected on our balance sheet(4)1,580 356 430 367 427 Total contractual obligations $ 14,405 $ 3,254 $ 2,441 $ 2,139 $ 6,571 (1)For further information, refer to Note 11 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K. (2)Purchase obligations represent non-cancelable contractual obligations primarily related to data center operations and facility build-outs, video and other content licensing revenue sharing arrangements, as well as purchases of inventory. (3)For further information, refer to Note 4 of the Notes to Consolidated Financial Statements included in Part II of this Annual Report on Form 10-K. (4)Other long-term liabilities represent cash obligations recorded on our consolidated balance sheets, including the short-term portion of these long-term liabilities and consist primarily of payments owed in connection with certain commercial agreements, investments and asset retirement obligations. In addition to the amounts above, we had long-term tax payable of $3.7 billion as of December 31, 2015 primarily related to uncertain tax positions. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes. As a result, this amount is not included in the above table. 39Alphabet Inc. and Google Inc. Off-Balance Sheet EntitiesAtArrangementsAs of December 31, 2012,2015, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.Critical Accounting Policies and EstimatesWe prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP)Generally Accepted Accounting Principles (GAAP). In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosure of contingent assets and liabilities. In some cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors.Please see Note 1 of Part II, Item 8 of this Annual Report on Form 10-K for the summary of significant accounting policies.Income TaxesWe are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes.Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes and the effective tax rate in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.Our effective tax rates have differed from the statutory rate primarily due to the tax impact of foreign operations, state taxes, certain benefits realized related to stock-based award activities,interest and research and experimentation tax credits. The effective tax rates were 21.2%, 21.0%, and 19.4% for 2010, 2011, and 2012. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates, the net gains and losses recognized by legal entities on certain hedges and related hedged intercompany and other transactions under our foreign exchange risk management program, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.penalties. In addition, we are subject to the continuous examination of our income tax returns by the IRS and other tax authorities.authorities which may assert assessments against us. We regularly assess the likelihood of adverse outcomes resulting from these examinations and assessments to determine the adequacy of our provision for income taxes.Loss ContingenciesWe are regularly subject to claims, suits, government investigations, and other proceedings involving competition and antitrust, intellectual property, privacy, tax,indirect taxes, labor and employment, commercial disputes, content generated by our users, goods and services offered by advertisers or publishers using our platforms, and other matters. Certain of these matters include speculative claims for substantial or indeterminate amounts of damages. We record a liability when we believe that it is both probable that a loss has been incurred, and the amount can be reasonably estimated. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the possible loss in the Notes to the Consolidated Financial Statements.We evaluate, on a monthly basis, developments in our legal matters that could affect the amount of liability that has been previously accrued, and the matters and related reasonably possible losses disclosed, and make adjustments and changes to our disclosures as appropriate. Significant judgment is required to determine both likelihood of there being and the estimated amount of a loss related to such matters. Until the final resolution of such matters, there may be an exposure to loss in excess of the amount recorded, and such amounts could be material. Should any of our estimates and assumptions change or prove to have been incorrect, it could have a material impact on our business, consolidated financial position, results of operations, or cash flows. See Note 11 of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information regarding contingencies.Business CombinationsWe allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values40Alphabet Inc. and Google Inc. of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets.Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and acquired patents and developed technology; and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed, as more fully discussed in Note 6 of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.GoodwillGoodwill is allocated to reporting units expected to benefit from the business combination. We evaluate our reporting units when changes in our operating structure occur, and if necessary, reassign goodwill using a relative fair value allocation approach. We test goodwill for impairment at the reporting unit level at least annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. Goodwill impairment tests require judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. As of December 31, 2015, no impairment of goodwill has been identified.Long-lived AssetsLong-lived assets, including property and equipment, long-term prepayments, and intangible assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets. An impairment loss would be recognized when estimated undiscounted future cash flows generated from the assets are less than their carrying amount. Measurement of an impairment loss would be based on the excess of the carrying amount of the asset group over its fair value.Impairment of Marketable and Non-Marketable SecuritiesWe periodically review our marketable and non-marketable securities for impairment. If we conclude that any of these investments are impaired, we determine whether such impairment is other-than-temporary. Factors we consider to make such determination include the duration and severity of the impairment, the reason for the decline in value and the potential recovery period and our intent to sell. For marketable debt securities, we also consider whether (1) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, and (2) the amortized cost basis cannot be recovered as a result of credit losses. If any impairment is considered other-than-temporary, we will write down the asset to its fair value and record the corresponding charge as interest and other income (expense), net.Prior period reclassificationPrior period balance related to inventories has been reclassified to conform to the current year presentation.We are exposed to financial market risks, including changes in currency exchange rates and interest rates.Foreign Currency Exchange RiskEconomic ExposureWe transact business globally in various foreign currencies and have significantmultiple currencies. Our international revenues, as well as costs and expenses denominated in foreign currencies. This exposescurrencies, expose us to the risk of fluctuations in foreign currency exchange rates.rates against the U.S. dollar. We purchaseare a net receiver of foreign currencies and therefore benefit from a weakening of the U.S. dollar and are adversely affected by a strengthening of the U.S. dollar relative to the foreign currency. As of December 31, 2015, our most significant currency exposures are the British pound, Euro, and Japanese yen.We use foreign exchange option contracts to reduce the volatility of cash flows related toprotect our forecasted revenues denominated in certain foreign currencies. The objective of the foreign exchange contracts is to better ensure that the U.S. dollar-equivalent cash flows are not adversely affected byearnings from adverse changes in the U.S. dollar/foreign currency exchange rates. These hedging contracts are designatedreduce, but do not entirely eliminate the impact of adverse currency exchange rate movements. We designate these option contracts as cash flow hedges.hedges for accounting purposes. The gain onfair value of the effective portion of a cash flow hedgeoption contract is initially reportedseparated into its intrinsic and time values. Changes in the time value are recorded in other income (expense), net. Changes in the intrinsic value are recorded as a component of accumulated other comprehensive income (AOCI) and subsequently reclassified into revenues whento offset the hedged revenues are recorded orexposures as interest and other income, net, if the hedged transaction becomes probable of not occurring. The notional principal of these contracts was approximately $6.5 billion and $9.5 billion as of December 31, 2011 and December 31, 2012. These foreign exchange contracts have maturities of 36 months or less.We considered the historical trends in currency exchange rates and determined that it was reasonably possible that changes in exchange rates of 20% for our foreign currencies instruments could be experienced in the near term. If the U.S. dollar weakened by 20%, as of December 31, 2014 and December 31, 2015, the amount recorded in AOCI reflecting intrinsic value related to our41Alphabet Inc. and Google Inc. foreign exchange options before tax effect would have been approximately $132$686 million and $9$280 million lower atas of December 31, 20112014 and December 31, 2012,2015, and the total amount of expense recorded as interest and other income (expense), net, would have been approximately $138$90 million and $140$275 million higher in the years ended December 31, 20112014 and December 31, 2012.2015. If the U.S. dollar strengthened by 20%, as of December 31, 2014 and December 31, 2015, the amount recorded in accumulated AOCI related to our foreign exchange options before tax effect would have been approximately $1.2$2.5 billion and $1.7$3.1 billion higher atas of December 31, 20112014 and December 31, 2012,2015, and the total amount of expense recorded as interest and other income (expense), net, would have been approximately $202$164 million and $159$372 million higher in the years ended December 31, 20112014 and December 31, 2012.Transaction ExposureOur exposure2015. In both scenarios, the change in the intrinsic value would be expected to offset a corresponding foreign currency transaction gains and losses is the result of certain net receivables due from ourchange in forecasted hedged revenues when recognized.In addition, we use foreign subsidiaries and customers being denominated in currencies other than the functional currency of the subsidiary, primarily the Euro and the British pound. Our foreign subsidiaries conduct their businesses in local currency. We have entered into foreign exchange forward contracts to offset the foreign exchange risk on certain monetaryour assets and liabilities denominated in currencies other than the local currency of the subsidiary. These forward contracts reduce, but do not entirely eliminate the impact of currency exchange rate movements on our assets and liabilities. The notional principal of foreign exchange contracts outstanding was $3.7 billioncurrency gains and $6.6 billion at December 31, 2011losses on the assets and December 31, 2012.We considered the historical trends in currency exchange rates and determined that it was reasonably possible that adverse changes in exchange rates of 20% for all currencies could be experienced in the near term. These changes would have resulted in an adverse impact on income before income taxes of approximately $27 million and $9 million at December 31, 2011 and December 31, 2012. The adverse impact at December 31, 2011 and December 31, 2012 is after consideration of the offsetting effect of approximately $503 million and $731 million from foreign exchange contracts in place for the months of December 2011 and December 2012. These reasonably possible adverse changes in exchange rates of 20% were applied to total monetary assets and liabilities denominated in currencies other than the local currencies at the balance sheet dates to compute the adverse impact these changes would have had on our income before income taxes in the near term.Interest Rate RiskOur investment strategy is to achieve a return that will allow us to preserve capital and maintain liquidity requirements. We invest our excess cash primarily in debt securities including those of the U.S. government and its agencies, corporate debt securities, agency mortgage-backed securities, money market and other funds, corporate debtmunicipal securities, mortgage-backedtime deposits, asset backed securities, and debt instruments issued by foreign governments, municipal securities, time deposits, and asset backed securities.governments. By policy, we limit the amount of credit exposure to any one issuer.Investments Our investments in both fixed rate and floating rate interest earning securities carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than predicted if interest rates fall. DueAs of December 31, 2014 and December 31, 2015, unrealized losses on our marketable debt securities were primarily due to temporary interest rate fluctuations as a result of higher market interest rates compared to interest rates at the time of purchase. We account for both fixed and variable rate securities at fair value with changes on gains and losses recorded in part to these factors, our income from investments may decrease inAOCI until the future. However, wesecurities are sold. We use certain interest rate derivative contracts to hedge interest rate risk ofgains and losses on our fixed income securities.During the second quarter of 2012, we began to hedge the variability of forecasted interest payments using forward-starting interest swaps. The total notional amount of these swaps was $1.0 billion These derivative contracts are accounted for as of December 31, 2012,hedges at fair value with terms calling for us to receive interest at a variable rate and to pay interest at a fixed rate. These forward-starting interest swaps effectively fix the benchmark interest rate on an anticipated debt issuance of $1.0 billion in 2014, and they will be terminated upon issuance of the debt.When entering into forward-starting interest rate swaps, we are subject to market risk with respect to changes in the underlying benchmark interest rate that impacts the fair value of the forward-starting interest swaps. We manage market risk by matching the terms of the swaps with the critical terms of the expected debt issuance.We considered the historical volatility of short-term interest rates and determined that it was reasonably possible that an adverse change of 100 basis points could be experienced in the near term. A hypothetical 1.00% (100 basis points) increase in interest rates would have resulted in a decrease in the fair valuesvalue of our marketable securities of approximately $934 million$1.2 billion and $1.1$1.3 billion at December 31, 2011 and 2012, after taking into consideration the offsetting effect from interest rate derivative contracts outstanding as of December 31, 20112014 and 2012. A hypothetical 1.00% (100 basis points) decrease in interest rates would have resulted in a decrease in the fair values of our forward-starting interest swaps of approximately $107 million at December 31, 2012.42Alphabet Inc. and Google Inc. Alphabet Inc. and Google Inc.INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page 52Financial Statements of Alphabet Inc.: Financial Statements:5455565758Financial Statements of Google Inc.: Notes to Consolidated Financial Statements (Alphabet Inc. and Google Inc.)59The supplementary financial information required by this Item 8 is included in Item 7 under the caption “Quarterly Results of Operations.”43Alphabet Inc. and Google Inc. REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Stockholders of GoogleAlphabet Inc.We have audited the accompanying consolidated balance sheets of GoogleAlphabet Inc. as of December 31, 20112014 and 2012,2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2012.2015. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of GoogleAlphabet Inc. atas of December 31, 20112014 and 2012,2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012,2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Alphabet Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 11, 2016 expressed an unqualified opinion thereon./s/ Ernst & Young LLP San Jose, California February 11, 2016 44Alphabet Inc. and Google Inc. REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Stockholders of Google Inc.We have audited the accompanying consolidated balance sheets of Google Inc. as of December 31, 2014 and 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Google Inc. as of December 31, 2014 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Google Inc.’s internal control over financial reporting as of December 31, 2012,2015, based on criteria established inInternal Control—IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated January 29, 2013February 11, 2016 expressed an unqualified opinion thereon./s/ Ernst & Young LLP /s/ ERNST & YOUNG LLP San Jose, California February 11, 2016 45January 29, 2013Alphabet Inc. and Google Inc. REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Stockholders of GoogleAlphabet Inc.We have audited GoogleAlphabet Inc.’s internal control over financial reporting as of December 31, 2012,2015, based on criteria established inInternal Control—IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). GoogleAlphabet Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’scompany’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, Alphabet Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Alphabet Inc. as of December 31, 2014 and 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2015 of Alphabet Inc. and our report dated February 11, 2016 expressed an unqualified opinion thereon./s/ Ernst & Young LLP San Jose, California February 11, 2016 46Alphabet Inc. and Google Inc. REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Stockholders of Google Inc.We have audited Google Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Google Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, Google Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2015, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Google Inc. as of December 31, 20112014 and 2012,2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 20122015 of Google Inc. and our report dated January 29, 2013February 11, 2016 expressed an unqualified opinion thereon./s/ Ernst & Young LLP /s/ ERNST & YOUNG LLP San Jose, California February 11, 2016 47January 29, 2013Alphabet Inc. and Google Inc. Alphabet Inc.CONSOLIDATED BALANCE SHEETS(In millions, except share and par value amounts which are reflected in thousands,and par value per share amounts) As of
December 31,
2011 As of
December 31,
2012 $ 9,983 $ 14,778 34,643 33,310 44,626 48,088 5,427 7,885 35 505 745 700 215 1,144 1,710 2,132 52,758 60,454 499 2,011 790 1,469 9,603 11,854 1,578 7,473 7,346 10,537 $ 72,574 $ 93,798 $ 588 $ 2,012 1,218 2,549 1,818 2,239 1,370 3,258 1,168 1,471 2,007 1,673 547 895 197 240 8,913 14,337 2,986 2,988 44 100 1,693 2,046 287 1,872 506 740 0 0 20,264 22,835 0 0 276 538 37,605 48,342 58,145 71,715 $ 72,574 $ 93,798 As of December 31, 2014 As of December 31, 2015 Assets Current assets: Cash and cash equivalents $ 18,347 $ 16,549 Marketable securities 46,048 56,517 Total cash, cash equivalents, and marketable securities (including securities loaned of $4,058 and $4,531) 64,395 73,066 Accounts receivable, net of allowance of $225 and $296 9,383 11,556 Receivable under reverse repurchase agreements 875 450 Income taxes receivable, net 591 1,903 Prepaid revenue share, expenses and other assets 3,412 3,139 Total current assets 78,656 90,114 Prepaid revenue share, expenses and other assets, non-current 3,187 3,181 Non-marketable investments 3,079 5,183 Deferred income taxes 176 251 Property and equipment, net 23,883 29,016 Intangible assets, net 4,607 3,847 Goodwill 15,599 15,869 Total assets $ 129,187 $ 147,461 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,715 $ 1,931 Short-term debt 2,009 3,225 Accrued compensation and benefits 3,069 3,539 Accrued expenses and other current liabilities 4,408 4,768 Accrued revenue share 1,952 2,329 Securities lending payable 2,778 2,428 Deferred revenue 752 788 Income taxes payable, net 96 302 Total current liabilities 16,779 19,310 Long-term debt 3,228 1,995 Deferred revenue, non-current 104 151 Income taxes payable, non-current 3,340 3,663 Deferred income taxes 758 189 Other long-term liabilities 1,118 1,822 Commitments and contingencies (Note 11) 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); 680,172 (Class A 286,560, Class B 53,213, Class C 340,399) and par value of $680 (Class A $287, Class B $53, Class C $340) and 687,348 (Class A 292,297, Class B 50,295, Class C 344,756) and par value of $687 (Class A $292, Class B $50, Class C $345) shares issued and outstanding 28,767 32,982 Accumulated other comprehensive income (loss) 27 (1,874 ) Retained earnings 75,066 89,223 Total stockholders’ equity 103,860 120,331 Total liabilities and stockholders’ equity $ 129,187 $ 147,461 See accompanying notes.48Alphabet Inc. and Google Inc. Alphabet Inc.CONSOLIDATED STATEMENTS OF INCOME(In millions, except per share amounts) Year Ended December 31, 2010 2011 2012 $ 29,321 $ 37,905 $ 46,039 0 0 4,136 $ 29,321 $ 37,905 $ 50,175 10,417 13,188 17,176 0 0 3,458 3,762 5,162 6,793 2,799 4,589 6,143 1,962 2,724 3,845 0 500 0 18,940 26,163 37,415 10,381 11,742 12,760 415 584 626 10,796 12,326 13,386 2,291 2,589 2,598 $ 8,505 $ 9,737 $ 10,788 0 0 (51 ) $ 8,505 $ 9,737 $ 10,737 $ 26.69 $ 30.17 $ 32.97 0.00 0.00 (0.16 ) $ 26.69 $ 30.17 $ 32.81 $ 26.31 $ 29.76 $ 32.46 0.00 0.00 (0.15 ) $ 26.31 $ 29.76 $ 32.31 $ 67 $ 249 $ 359 0 0 14 861 1,061 1,325 261 361 498 187 303 453 $ 1,376 $ 1,974 $ 2,649 Year Ended December 31, 2013 2014 2015 Revenues $ 55,519 $ 66,001 $ 74,989 Costs and expenses: Cost of revenues 21,993 25,691 28,164 Research and development 7,137 9,832 12,282 Sales and marketing 6,554 8,131 9,047 General and administrative 4,432 5,851 6,136 Total costs and expenses 40,116 49,505 55,629 Income from operations 15,403 16,496 19,360 Other income (expense), net 496 763 291 Income from continuing operations before income taxes 15,899 17,259 19,651 Provision for income taxes 2,739 3,639 3,303 Net income from continuing operations $ 13,160 $ 13,620 $ 16,348 Net income (loss) from discontinued operations (427 ) 516 0 Net income $ 12,733 $ 14,136 $ 16,348 Less: Adjustment Payment to Class C capital stockholders 0 0 522 Net income available to all stockholders $ 12,733 $ 14,136 $ 15,826 Basic net income (loss) per share of Class A and B common stock: Continuing operations $ 19.77 $ 20.15 $ 23.11 Discontinued operations (0.64 ) 0.76 0.00 Basic net income per share of Class A and B common stock $ 19.13 $ 20.91 $ 23.11 Basic net income (loss) per share of Class C capital stock: Continuing operations $ 19.77 $ 20.15 $ 24.63 Discontinued operations (0.64 ) 0.76 0.00 Basic net income per share of Class C capital stock $ 19.13 $ 20.91 $ 24.63 Diluted net income (loss) per share of Class A and B common stock: Continuing operations $ 19.42 $ 19.82 $ 22.84 Discontinued operations (0.63 ) 0.75 0.00 Diluted net income per share of Class A and B common stock $ 18.79 $ 20.57 $ 22.84 Diluted net income (loss) per share of Class C capital stock: Continuing operations $ 19.42 $ 19.82 $ 24.34 Discontinued operations (0.63 ) 0.75 0.00 Diluted net income per share of Class C capital stock $ 18.79 $ 20.57 $ 24.34 See accompanying notes.49Alphabet Inc. and Google Inc. Alphabet Inc.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In millions) Year Ended December 31, 2010 2011 2012 $ 8,505 $ 9,737 $ 10,737 (124 ) (107 ) 75 232 348 493 (151 ) (115 ) (216 ) 81 233 277 196 39 47 (120 ) (27 ) (137 ) 76 12 (90 ) 33 138 262 $ 8,538 $ 9,875 $ 10,999 Year Ended December 31, 2013 2014 2015 Net income $ 12,733 $ 14,136 $ 16,348 Other comprehensive income (loss): Change in foreign currency translation adjustment 89 (996 ) (1,067 ) Available-for-sale investments: Change in net unrealized gains (losses) (392 ) 505 (715 ) Less: reclassification adjustment for net (gains) losses included in net income (162 ) (134 ) 208 Net change (net of tax effect of $212, $60, and $29) (554 ) 371 (507 ) Cash flow hedges: Change in net unrealized gains 112 651 676 Less: reclassification adjustment for net gains included in net income (60 ) (124 ) (1,003 ) Net change (net of tax effect of $30, $196, and $115) 52 527 (327 ) Other comprehensive loss (413 ) (98 ) (1,901 ) Comprehensive income $ 12,320 $ 14,038 $ 14,447 See accompanying notes.50Alphabet Inc. and Google Inc. Alphabet Inc.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In millions, except for share amounts which are reflected in thousands) Class A and Class B
Common Stock and
Additional Paid-In Capital Accumulated
Other
Comprehensive
Income Retained
Earnings Total
Stockholders’
Equity Shares Amount 317,772 $ 15,817 $ 105 $ 20,082 $ 36,004 5,126 1,412 0 0 1,412 (1,597 ) (82 ) 0 (719 ) (801 ) 1,376 0 0 1,376 72 0 0 72 (360 ) 0 0 (360 ) 0 0 8,505 8,505 0 33 0 33 321,301 18,235 138 27,868 46,241 3,594 621 0 0 621 1,974 0 0 1,974 60 0 0 60 (626 ) 0 0 (626 ) 0 0 9,737 9,737 0 138 0 138 324,895 20,264 276 37,605 58,145 5,084 736 0 0 736 2,692 0 0 2,692 166 0 0 166 (1,023 ) 0 0 (1,023 ) 0 0 10,737 10,737 0 262 0 262 329,979 $ 22,835 $ 538 $ 48,342 $ 71,715 Class A and Class BCommon Stock, Class C Capital Stock andAdditional Paid-In Capital AccumulatedOtherComprehensiveIncome (Loss) RetainedEarnings TotalStockholders’Equity Shares Amount Balance as of December 31, 2012 659,958 $ 22,835 $ 538 $ 48,197 $ 71,570 Common stock issued 11,706 1,174 0 0 1,174 Stock-based compensation expense 3,343 0 0 3,343 Stock-based compensation tax benefits 449 0 0 449 Tax withholding related to vesting of restricted stock units (1,879 ) 0 0 (1,879 ) Net income 0 0 12,733 12,733 Other comprehensive loss 0 (413 ) 0 (413 ) Balance as of December 31, 2013 671,664 25,922 125 60,930 86,977 Common and capital stock issued 8,508 465 0 0 465 Stock-based compensation expense 4,279 0 0 4,279 Stock-based compensation tax benefits 625 0 0 625 Tax withholding related to vesting of restricted stock units (2,524 ) 0 0 (2,524 ) Net income 0 0 14,136 14,136 Other comprehensive loss 0 (98 ) 0 (98 ) Balance as of December 31, 2014 680,172 28,767 27 75,066 103,860 Common and capital stock issued 8,714 664 0 0 664 Stock-based compensation expense 5,151 0 0 5,151 Stock-based compensation tax benefits 815 0 0 815 Tax withholding related to vesting of restricted stock units (2,779 ) 0 0 (2,779 ) Repurchases of capital stock (2,391 ) (111 ) 0 (1,669 ) (1,780 ) Adjustment Payment to Class C capital stockholders 853 475 0 (522 ) (47 ) Net income 0 0 16,348 16,348 Other comprehensive loss 0 (1,901 ) 0 (1,901 ) Balance as of December 31, 2015 687,348 $ 32,982 $ (1,874 ) $ 89,223 $ 120,331 See accompanying notes.51Alphabet Inc. and Google Inc. Alphabet Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS(In millions) Year Ended December 31, 2010 2011 2012 $ 8,505 $ 9,737 $ 10,737 1,067 1,396 1,988 329 455 974 1,376 1,974 2,692 (94 ) (86 ) (188 ) 9 343 (266 ) 0 110 0 0 0 (188 ) (12 ) 6 (28 ) (1,129 ) (1,156 ) (787 ) 102 731 1,492 0 (30 ) 301 (414 ) (232 ) (833 ) 272 101 (499 ) 745 795 762 214 259 299 111 162 163 11,081 14,565 16,619 (4,018 ) (3,438 ) (3,273 ) (43,985 ) (61,672 ) (33,410 ) 37,099 48,746 35,180 (320 ) (428 ) (696 ) 2,361 (354 ) (334 ) (750 ) 5 45 (1,067 ) (1,900 ) (10,568 ) (10,680 ) (19,041 ) (13,056 ) 294 (5 ) (287 ) 94 86 188 (801 ) 0 0 5,246 10,905 16,109 (1,783 ) (10,179 ) (14,781 ) 3,050 807 1,229 (19 ) 22 3 3,432 (3,647 ) 4,795 10,198 13,630 9,983 $ 13,630 $ 9,983 $ 14,778 $ 0 $ 40 $ 74 $ 2,175 $ 1,471 $ 2,034 $ 750 $ 0 $ 41 Year Ended December 31, 2013 2014 2015 Operating activities Net income $ 12,733 $ 14,136 $ 16,348 Adjustments: Depreciation and impairment of property and equipment 2,781 3,523 4,132 Amortization and impairment of intangible assets 1,158 1,456 931 Stock-based compensation expense 3,343 4,279 5,203 Excess tax benefits from stock-based award activities (481 ) (648 ) (548 ) Deferred income taxes (437 ) (104 ) (179 ) Gain on divestiture of business (700 ) (740 ) 0 (Gain) loss on marketable and non-marketable investments, net (166 ) (390 ) 334 Other 272 192 212 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable (1,307 ) (1,641 ) (2,094 ) Income taxes, net 588 591 (179 ) Prepaid revenue share, expenses and other assets (930 ) 459 (318 ) Accounts payable 605 436 203 Accrued expenses and other liabilities 713 757 1,597 Accrued revenue share 254 245 339 Deferred revenue 233 (175 ) 43 Net cash provided by operating activities 18,659 22,376 26,024 Investing activities Purchases of property and equipment (7,358 ) (10,959 ) (9,915 ) Purchases of marketable securities (45,444 ) (56,310 ) (74,368 ) Maturities and sales of marketable securities 38,314 51,315 62,905 Purchases of non-marketable investments (569 ) (1,227 ) (2,172 ) Cash collateral related to securities lending (299 ) 1,403 (350 ) Investments in reverse repurchase agreements 600 (775 ) 425 Proceeds from divestiture of business 2,525 386 0 Acquisitions, net of cash acquired, and purchases of intangibles and other assets (1,448 ) (4,888 ) (236 ) Net cash used in investing activities (13,679 ) (21,055 ) (23,711 ) Financing activities Net payments related to stock-based award activities (781 ) (2,069 ) (2,375 ) Excess tax benefits from stock-based award activities 481 648 548 Adjustment Payment to Class C capital stockholders 0 0 (47 ) Repurchases of capital stock 0 0 (1,780 ) Proceeds from issuance of debt, net of costs 10,768 11,625 13,705 Repayments of debt (11,325 ) (11,643 ) (13,728 ) Net cash used in financing activities (857 ) (1,439 ) (3,677 ) Effect of exchange rate changes on cash and cash equivalents (3 ) (433 ) (434 ) Net increase (decrease) in cash and cash equivalents 4,120 (551 ) (1,798 ) Cash and cash equivalents at beginning of period 14,778 18,898 18,347 Cash and cash equivalents at end of period $ 18,898 $ 18,347 $ 16,549 Supplemental disclosures of cash flow information Cash paid for taxes $ 1,932 $ 2,819 $ 3,338 Cash paid for interest 72 86 96 See accompanying notes.52Alphabet Inc. and Google Inc. Google Inc.CONSOLIDATED BALANCE SHEETS(In millions, except share and par value amounts which are reflected in thousands,and par value per share amounts) As of December 31, 2014 As of December 31, 2015 Assets Current assets: Cash and cash equivalents $ 18,347 $ 16,549 Marketable securities 46,048 56,517 Total cash, cash equivalents, and marketable securities (including securities loaned of $4,058 and $4,531) 64,395 73,066 Accounts receivable, net of allowance of $225 and $296 9,383 11,556 Receivable under reverse repurchase agreements 875 450 Income taxes receivable, net 591 1,903 Prepaid revenue share, expenses and other assets 3,412 3,139 Total current assets 78,656 90,114 Prepaid revenue share, expenses and other assets, non-current 3,187 3,181 Non-marketable investments 3,079 5,183 Deferred income taxes 176 251 Property and equipment, net 23,883 29,016 Intangible assets, net 4,607 3,847 Goodwill 15,599 15,869 Total assets $ 129,187 $ 147,461 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 1,715 $ 1,931 Short-term debt 2,009 3,225 Accrued compensation and benefits 3,069 3,539 Accrued expenses and other current liabilities 4,408 4,768 Accrued revenue share 1,952 2,329 Securities lending payable 2,778 2,428 Deferred revenue 752 788 Income taxes payable, net 96 302 Total current liabilities 16,779 19,310 Long-term debt 3,228 1,995 Deferred revenue, non-current 104 151 Income taxes payable, non-current 3,340 3,663 Deferred income taxes 758 189 Other long-term liabilities 1,118 1,822 Commitments and contingencies (Note 11) Stockholders’ equity: Convertible preferred stock, $0.001 par value per share; 100,000 shares authorized, no shares issued and outstanding; 0.5 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); 680,172 (Class A 286,560, Class B 53,213, Class C 340,399), and par value of $680 (Class A $287, Class B $53, Class C $340); and 1.5 shares authorized (Class A 0.5, Class B 0.5, Class C 0.5); 0.3 (Class A 0.1, Class B 0.1, Class C 0.1), and par value of $0, shares issued and outstanding 28,767 31,313 Accumulated other comprehensive income (loss) 27 (1,874 ) Retained earnings 75,066 90,892 Total stockholders’ equity 103,860 120,331 Total liabilities and stockholders’ equity $ 129,187 $ 147,461 See accompanying notes.53Alphabet Inc. and Google Inc. Google Inc.CONSOLIDATED STATEMENTS OF INCOME(In millions) Year Ended December 31, 2013 2014 2015 Revenues $ 55,519 $ 66,001 $ 74,989 Costs and expenses: Cost of revenues 21,993 25,691 28,164 Research and development 7,137 9,832 12,282 Sales and marketing 6,554 8,131 9,047 General and administrative 4,432 5,851 6,136 Total costs and expenses 40,116 49,505 55,629 Income from operations 15,403 16,496 19,360 Other income (expense), net 496 763 291 Income from continuing operations before income taxes 15,899 17,259 19,651 Provision for income taxes 2,739 3,639 3,303 Net income from continuing operations $ 13,160 $ 13,620 $ 16,348 Net income (loss) from discontinued operations (427 ) 516 0 Net income $ 12,733 $ 14,136 $ 16,348 Less: Adjustment Payment to Class C capital stockholders 0 0 522 Net income available to all stockholders $ 12,733 $ 14,136 $ 15,826 See accompanying notes.54Alphabet Inc. and Google Inc. Google Inc.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(In millions) Year Ended December 31, 2013 2014 2015 Net income $ 12,733 $ 14,136 $ 16,348 Other comprehensive income (loss): Change in foreign currency translation adjustment 89 (996 ) (1,067 ) Available-for-sale investments: Change in net unrealized gains (losses) (392 ) 505 (715 ) Less: reclassification adjustment for net (gains) losses included in net income (162 ) (134 ) 208 Net change (net of tax effect of $212, $60, and $29) (554 ) 371 (507 ) Cash flow hedges: Change in net unrealized gains 112 651 676 Less: reclassification adjustment for net gains included in net income (60 ) (124 ) (1,003 ) Net change (net of tax effect of $30, $196, and $115) 52 527 (327 ) Other comprehensive loss (413 ) (98 ) (1,901 ) Comprehensive income $ 12,320 $ 14,038 $ 14,447 See accompanying notes.55Alphabet Inc. and Google Inc. Google Inc.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In millions, except share amounts which are reflected in thousands) Class A and Class BCommon Stock, Class C Capital Stock andAdditional Paid-In Capital AccumulatedOtherComprehensiveIncome (Loss) RetainedEarnings TotalStockholders’Equity Shares Amount Balance as of December 31, 2012 659,958 $ 22,835 $ 538 $ 48,197 $ 71,570 Common stock issued 11,706 1,174 0 0 1,174 Stock-based compensation expense 3,343 0 0 3,343 Stock-based compensation tax benefits 449 0 0 449 Tax withholding related to vesting of restricted stock units (1,879 ) 0 0 (1,879 ) Net income 0 0 12,733 12,733 Other comprehensive loss 0 (413 ) 0 (413 ) Balance as of December 31, 2013 671,664 25,922 125 60,930 86,977 Common and capital stock issued 8,508 465 0 0 465 Stock-based compensation expense 4,279 0 0 4,279 Stock-based compensation tax benefits 625 0 0 625 Tax withholding related to vesting of restricted stock units (2,524 ) 0 0 (2,524 ) Net income 0 0 14,136 14,136 Other comprehensive loss 0 (98 ) 0 (98 ) Balance as of December 31, 2014 680,172 28,767 27 75,066 103,860 Common and capital stock issued 6,659 331 0 0 331 Stock-based compensation expense 5,151 0 0 5,151 Stock-based compensation tax benefits 815 0 0 815 Tax withholding related to vesting of restricted stock units (1,954 ) 0 0 (1,954 ) Alphabet share exchange (687,684 ) 0 0 0 0 Capital transactions with Alphabet (2,272 ) 0 0 (2,272 ) Adjustment Payment to Class C capital stockholders 853 475 0 (522 ) (47 ) Net income 0 0 16,348 16,348 Other comprehensive loss 0 (1,901 ) 0 (1,901 ) Balance as of December 31, 2015 0 $ 31,313 $ (1,874 ) $ 90,892 $ 120,331 See accompanying notes.56Alphabet Inc. and Google Inc. Google Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS(In millions) Year Ended December 31, 2013 2014 2015 Operating activities Net income $ 12,733 $ 14,136 $ 16,348 Adjustments: Depreciation and impairment of property and equipment 2,781 3,523 4,132 Amortization and impairment of intangible assets 1,158 1,456 931 Stock-based compensation expense 3,343 4,279 5,203 Excess tax benefits from stock-based award activities (481 ) (648 ) (548 ) Deferred income taxes (437 ) (104 ) (179 ) Gain on divestiture of business (700 ) (740 ) 0 (Gain) loss on marketable and non-marketable investments, net (166 ) (390 ) 334 Other 272 192 212 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable (1,307 ) (1,641 ) (2,094 ) Income taxes, net 588 591 (179 ) Prepaid revenue share, expenses and other assets (930 ) 459 (318 ) Accounts payable 605 436 203 Accrued expenses and other liabilities 713 757 1,597 Accrued revenue share 254 245 339 Deferred revenue 233 (175 ) 43 Net cash provided by operating activities 18,659 22,376 26,024 Investing activities Purchases of property and equipment (7,358 ) (10,959 ) (9,915 ) Purchases of marketable securities (45,444 ) (56,310 ) (74,368 ) Maturities and sales of marketable securities 38,314 51,315 62,905 Purchases of non-marketable investments (569 ) (1,227 ) (2,172 ) Cash collateral related to securities lending (299 ) 1,403 (350 ) Investments in reverse repurchase agreements 600 (775 ) 425 Proceeds from divestiture of business 2,525 386 0 Acquisitions, net of cash acquired, and purchases of intangibles and other assets (1,448 ) (4,888 ) (236 ) Net cash used in investing activities (13,679 ) (21,055 ) (23,711 ) Financing activities Net payments related to stock-based award activities (781 ) (2,069 ) (1,612 ) Excess tax benefits from stock-based award activities 481 648 548 Adjustment Payment to Class C capital stockholders 0 0 (47 ) Capital transactions with Alphabet 0 0 (2,543 ) Proceeds from issuance of debt, net of costs 10,768 11,625 13,705 Repayments of debt (11,325 ) (11,643 ) (13,728 ) Net cash used in financing activities (857 ) (1,439 ) (3,677 ) Effect of exchange rate changes on cash and cash equivalents (3 ) (433 ) (434 ) Net increase (decrease) in cash and cash equivalents 4,120 (551 ) (1,798 ) Cash and cash equivalents at beginning of period 14,778 18,898 18,347 Cash and cash equivalents at end of period $ 18,898 $ 18,347 $ 16,549 Supplemental disclosures of cash flow information Cash paid for taxes $ 1,932 $ 2,819 $ 3,338 Cash paid for interest 72 86 96 See accompanying notes.57Alphabet Inc. and Google Inc. Alphabet Inc. and Google Inc.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1. Google Inc.Nature of Operations and Summary of Significant Accounting PoliciesNature of OperationsWe were incorporated in California in September 1998. We were1998 and re-incorporated in the State of Delaware in August 2003. We generate revenues primarily by delivering relevant, cost-effective online advertising in our Google segment. In addition, as a result of our acquisitionadvertising.On April 17, 2013, we sold the Motorola Home business (Motorola Home) to Arris Group, Inc. (Arris). The financial results of Motorola Mobility Holdings, Inc. (Motorola) on May 22, 2012, we generate revenues from sales of mobile devices in our Motorola Mobile (Mobile) segment and digital set-top boxes in our Motorola Home (Home) segment. In December 2012, we entered into an agreement to dispose Home, and the related financial results are presented as net lossincome (loss) from discontinued operations on the Consolidated Statements of Income. AssetsIncome for the year ended December 31, 2013. See Note 9 for further discussion of the sale.On April 2, 2014, we completed a two-for-one stock split effected in the form of a stock dividend (the Stock Split). All references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the Stock Split. See Note 12 for additional information about the Stock Split.On October 29, 2014, we sold the Motorola Mobile business (Motorola Mobile) to Lenovo Group Limited (Lenovo). The financial results of Motorola Mobile are presented as net income (loss) from discontinued operations on the Consolidated Statements of Income for the years ended December 31, 2013 and 2014. See Note 9 for further discussion of the sale.On August 10, 2015, we announced plans to create a new public holding company, Alphabet Inc. (Alphabet), and a new operating structure. On October 2, 2015, we implemented the holding company reorganization, and as a result, Alphabet became the successor issuer to Google Inc. (Google).The implementation of the holding company reorganization on October 2, 2015 was accounted for as a merger under common control. Alphabet has recognized the assets and liabilities of Motorola Home are not presented as held for sale on the Consolidated Balance Sheets because they are not material.Basis of ConsolidationThe consolidated financial statements and notes thereto are being presented in a combined report being filed by two separate registrants: Alphabet and Google. The Consolidated Statements of Stockholders’ Equity and Consolidated Statements of Cash Flows are the only statements with differences between Alphabet and Google. The differences relate to transactions between Alphabet and Google which are accounted for as capital transactions. Refer to Note 13 for additional information.Basis of ConsolidationThe consolidated financial statements of Alphabet and Google include the accounts of Alphabet and Google, Inc.respectively, and our wholly-owned subsidiaries.all wholly owned subsidiaries as well as all variable interest entities where we are the primary beneficiary. All intercompany balances and transactions have been eliminated.Use of EstimatesThe preparation of consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles (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 accounts receivable and sales allowances, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of stock-based awards, inventory valuations, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.58Alphabet Inc. and Google Inc. Revenue RecognitionThe following table presents our revenues by segment and revenue source (in millions): Year Ended December 31, 2010 2011 2012 $ 19,444 $ 26,145 $ 31,221 8,792 10,386 12,465 28,236 36,531 43,686 1,085 1,374 2,353 29,321 37,905 46,039 0 0 4,136 $ 29,321 $ 37,905 $ 50,175 Year Ended December 31, 2013 2014 2015 Google segment Google websites $ 37,422 $ 45,085 $ 52,357 Google Network Members' websites (1)13,650 14,539 15,033 Google advertising revenues 51,072 59,624 67,390 Google other revenues (1)4,435 6,050 7,151 Google segment revenues $ 55,507 $ 65,674 $ 74,541 Other Bets Other Bets revenues $ 12 $ 327 $ 448 Consolidated revenues $ 55,519 $ 66,001 $ 74,989 (1)Prior period amounts have been adjusted to reflect the reclassification primarily related to DoubleClick ad serving software revenues from Google other revenues to Advertising Revenues from Google Network Members' websites to conform with current period presentation. We recognizegenerate revenues primarily by delivering performance and brand advertising. Performance advertising creates and delivers relevant ads that users will click, leading to direct engagement with advertisers. Brand advertising enhances users’ awareness of and affinity with advertisers’ products and services, through videos, text, images, and other ads that run across various devices.Google AdWords is our auction-based advertising program that enables performance advertisers to place text-based and display ads on Google websites and our Google Network Members’ websites. Google AdSense refers to the online programs through which we distribute our advertisers’ AdWords ads for display on our Google Network Members’ websites. Most of our customers pay us on a cost-per-click basis, which means that an advertiser pays us only when a user engages with the ads by clicking on an ad on Google websites or Google Network Members' websites or by viewing YouTube engagement ads like TrueView (counted as an engagement when the user chooses not to skip the ad). We also offer advertising on a cost-per-impression basis that enables our brand advertisers to pay us based on the number of times their ads display on Google websites and our Google Network Members’ websites as specified by the advertisers.Revenue from advertising is recognized when the services or products have been provided or delivered, the fees we charge are fixed or determinable, we and our advertisers or other customers understand the specific nature and terms of the agreed upon transactions, and collectability is reasonably assured.GoogleGoogle AdWords is our auction-based advertising program that enables advertisers to place text-based and display ads on our websites and our Google Network Members’ websites. Display advertising comprises the videos, text, images, and other interactive ads that run across the web on computers and mobile devices, including smart phones and handheld computers such as netbooks and tablets. Most of our customers pay us on a cost-per-click basis, which means that an advertiser pays us only when a user clicks on one of its ads. We also offer advertising on a cost-per-impression basis that enables advertisers to pay us based on the number of times their ads display on our websites and our Google Network Members’ websites as specified by the advertisers.Google AdSense refers to the online programs through which we distribute our advertisers’ AdWords ads for display on our Google Network Members’ websites.ourGoogle websites or our Google Network Members’ websites. For those advertisers using our cost-per-impression pricing, we recognize as revenues the fees charged to advertisers each time their ads are displayed on ourGoogle websites or our Google Network Members’ websites. We report our Google AdSense revenues and traffic acquisition costs due to our Google Network Members on a gross basis principally because we are the primary obligor to our advertisers.We record deferred revenues upon invoicing or when cash payments are received in advance of our performance in the underlying agreement on the accompanying Consolidated Balance Sheets.MotorolaForRevenue from hardware product sales where we sell directly to end customers or through distribution channels revenue recognitionis generally occursrecognized when products have been shipped, risk of loss has transferred to the customer, objective evidence exists that customer acceptance provisions have been met, no significant obligations remain and allowances for discounts, price protection, returns and customer incentives can be reasonably and reliably estimated. Recorded revenuesRevenues are reduced byreported net of these allowances. Where these allowances cannot be reasonably and reliably estimated, we recognize revenue at the time the product sells through the distribution channel to the end customer.For the sale of certain third-party products and services, we evaluate whether it is appropriate to recognize revenue based on the gross amount billed to the customers or the net amount earned as revenue share. Generally, when we record revenue on a gross basis, we are the primary obligor in a transaction, and have also considered other factors, including whether we are subject to inventory risk or have latitude in establishing prices.For multi-element arrangements, that include multiple deliverables, primarily for productsincluding those that contain software essential to the hardware products’ functionality and services, we allocate revenue to each unit of accounting based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling prices to be used for allocating revenue: (i) vendor-specific objective59Alphabet Inc. and Google Inc. evidence of fair value (VSOE), (ii) third-party evidence of selling price, and (iii) best estimate of the selling price (ESP). VSOE generally exists only when we sell the deliverable separately and is the price actually charged by us for that deliverable. ESPs reflect our best estimates of what the selling pricesprice of elementsthe deliverable would be if they wereit was sold regularly on a stand-alone basis.Revenues from HomeWe record deferred revenues when cash payments are includedreceived in net loss from discontinued operations.Cost of RevenuesGoogleCost of revenues consists primarily of traffic acquisition costs. Traffic acquisition costs consist ofwhich are the advertising revenues shared with our Google Network Members and the amounts ultimately paid to our Google Network members under AdSense arrangements and to certain otherdistribution partners (our distribution partners) who distribute our toolbar and other products (collectively referred to as access points)browser orwebsite (collectively referred to as distribution arrangements). These amounts are primarily based on the revenue share and fixed fee arrangements with our Google Network Members and distribution partners.Certain distribution arrangements require us to pay our partners based on a fee per access point delivered and not exclusively—or at all—based on revenue share. These fees are non-refundable. Further, these arrangements are terminable at will, although under the terms of certain contracts we or our distribution partners may be subject to penalties in the event of early termination. We recognize fees under these arrangements over the estimated useful lives of the access points (approximately two years) to the extent we can reasonably estimate those lives and they are longer than one year, or based on any contractual revenue share, if greater. Otherwise, the fees are charged to expense as incurred. The estimated useful life of the access points is based on the historical average period of time they generate traffic and revenues. Further, we review the access points for impairment by distribution partner, type, and geography, and we have not made any impairment to date.Costwebsite.Additionally, other costs of revenues also includes the following:The expenses associated with the operation of our data centers including(including depreciation, labor, energy, and bandwidth costs);Content acquisition costs creditprimarily related to payments to certain content providers from whom we license their video and other content for distribution on YouTube and Google Play (we share most of the fees these sales generate with content providers or pay a fixed fee to these content providers);Credit card and other transaction fees related to processing customer transactions, amortization of acquired intangible assets, as well as content acquisition costs. We have entered into arrangements with certain content providers under which we distribute or license their video and other content. In a number of these arrangements, we display ads on the pages of our web sites from which the content is viewed and share most of the fees these ads generate with the content providers. To the extent we are obligated to make guaranteed minimum revenuetransactions;Stock-based compensation expense;Revenue share payments to our content providers,mobile carriers;Inventory costs for hardware we recognize as content acquisition costs the contractual revenue share amount or the minimum guarantee on a straight-line basis, whichever is greater, over the termssell; andAmortization of the agreements.Prepaid revenue share and distribution fees are included in prepaid revenue share, expenses, and other assets on the accompanying Consolidated Balance Sheets.MotorolaCost of revenues from our Motorola business related to delivered hardware, including estimated warranty costs, are recognized at the time of sale. Cost of revenues from Home are included in net loss from discontinued operations.Stock-based CompensationWe have elected to use the Black-Scholes-Merton (BSM) option pricing model to determine the fair value of stock options on the dates of grant.Restricted stock units (RSUs) are measured based on the fair market valuesvalue of the underlying stock on the datesdate of grant. Shares are issued on the vesting dates net of the minimum statutory tax withholding requirements to be paid by us on behalf of our employees. As a result, the actual number of shares issued will be fewer than the actual number of RSUs outstanding. Furthermore, weWe record the liability for withholding amounts to be paid by us primarily as a reduction to additional paid-in capital when paid. Also,For stock option awards, we determined fair value using the Black-Scholes-Merton (BSM) option pricing model on the date of grant.Stock-based compensation includes awards we expect to settle in Alphabet stock as well as awards we will ultimately settle in cash. We recognize stock-based compensation, less an estimate for forfeitures, using the straight-line method.We include as part of cash flows from financing activities the benefits of tax deductions in excess of the tax-effected compensation of the related stock-based awards for options exercised and RSUs vested during the period. During the years ended December 31, 2010, December 31, 2011,2013, 2014, and December 31, 2012,2015, the amount of cash received from the exercise of stock options was $656$1,174 million, $621$465 million, and $736$393 million, respectively.We have elected to account for the indirect effects of stock-based awards -- primarily the research and development tax credit -- through the totalConsolidated Statements of Income. Total direct tax benefit realized, including the excess tax benefit, from stock-based award activities was $355 million, $451 million, and $747 million. We have elected to account for the indirect effects of stock-based awards—primarily the research and development tax credit—through the Consolidated Statements of Income.Forduring the years ended December 31, 2010, December 31, 2011,2013, 2014, and December 31, 2012, we recognized stock-based compensation expense and related tax benefits of $1,3762015, was $1,195 million, $1,356 million, and $314$1,544 million, $1,974 million and $413 million, and $2,649 million and $591 million. Additionally, net loss from discontinued operations for the year ended December 31, 2012 includes stock-based compensation expense and related tax benefits of $43 million and $11 million.Certain Risks and ConcentrationsOur revenues are primarily derived from online advertising, the market for which is highly competitive and rapidly changing. In addition, our revenues are generated from a multitude of vertical market segments in countries around the world. Significant changes in this industry or changes in customer buying or advertiser spending behavior could adversely affect our operating results. In addition, for our Motorola business, nearly all of our Motorola products (other than some prototypes)We are manufactured outside the U.S., primarily in China, Taiwan and Brazil.Financial instruments that potentially subject us to concentrations of credit risk consist principally offrom cash and cash equivalents, marketable securities, foreign exchange contracts, and accounts receivable. Cash equivalents and marketable securities consist primarily of time deposits, money market and other funds, including cash collateral received related to our securities lending program, highly liquid debt instruments of the U.S. government and its agencies, debt instruments issued by foreign governments and municipalities in the U.S., corporate securities, agency mortgage-backed securities, and asset-backed securities. Foreign exchange contracts are transacted with various financial institutions with high credit standing.60Alphabet Inc. and Google Inc. Accounts receivable are typically unsecured and are derived from revenues earned from customers located around the world. In 2010, 2011,2013, 2014, and 2012,2015, we generated approximately 48%46%, 46%45%, and 47%46% of our revenues from customers based in the U.S., with the majority of revenues from customers outside of the U.S. located in Europe and Japan. Many of our Google Network Members are in the internet industry. We perform ongoing evaluations to determine customer credit and we limit the amount of credit we extend, but generally we do not require collateral from our customers. We maintain reserves for estimated credit losses and these losses have generally been within our expectations.No individual customer or groups of affiliated customers represented more than 10% of our revenues in 2010, 2011, and 2012.Fair Value of Financial InstrumentsOur financial assets and financial liabilities that include cash equivalents, marketable securities, and foreign currency and interest rate derivative contracts, and non-marketable debt securities are measured and recorded at fair value on a recurring basis. We measure certain otherfinancial assets including our non-marketable equity securities at fair value for disclosure purposes, as well as, on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. Our other current financial assets and our other current financial liabilities have fair values that approximate their carrying value.Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. Assets and are therefore notliabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value:Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.Level 2 - Include other inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings.Level 3 - Unobservable inputs that are supported by little or no market activities.The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.Cash, Cash Equivalents, and Marketable SecuritiesWe invest ourall excess cash primarily in time deposits, money market and other funds,debt securities including cash collateral received related to our securities lending program, highly liquid debt instrumentsthose of the U.S. government and its agencies, corporate debt securities, agency mortgage-backed securities, money market and other funds, municipal securities, time deposits, asset backed securities, and debt instruments issued by foreign governments and municipalities in the U.S., corporate securities, mortgage-backed securities, and asset-backed securities.We classify all highly liquid investments withthat are readily convertible to known amounts of cash and have stated maturities of three months or less from the date of purchase as cash equivalents and all highly liquid investmentsthose with stated maturities of greater than three months as marketable securities.We determine the appropriate classification of our investments in marketable securities at the time of purchase and reevaluate such designation at each balance sheet date. We have classified and accounted for our marketable securities as available-for-sale. We may or may not hold securities with stated maturities greater than 12 months until maturity. After consideration of our risk versus reward objectives, as well as our liquidity requirements, we may sell these securities prior to their stated maturities. As we view these securities as available to support current operations, we classify highly liquid securities with maturities beyond 12 months as current assets under the caption marketable securities in the accompanying Consolidated Balance Sheets. We carry these securities at fair value, and report the unrealized gains and losses, net of taxes, as a component of stockholders’ equity, except for unrealized losses determined to be other-than-temporary, which we record as interest andwithin other income (expense), net. We determine any realized gains or losses on the sale of marketable securities on a specific identification method, and we record such gains and losses as a component of interest and other income (expense), net.Non-Marketable Equity SecuritiesWe have accounted for non-marketable equity securitiesinvestments either under the equity or cost method. Investments through which we exercise significant influence but do not have control over the investee are accounted for under the equity method. Investments through which we are not able to exercise significant influence over the investee are accounted for under the cost method.61Alphabet Inc. and Google Inc. We have accounted for our non-marketable investments that meet the definition of a debt security as available-for-sale securities. Since these securities do not have contractual maturity dates and we do not intend to liquidate them in the next 12 months, we have classified them as non-current assets on the accompanying Consolidated Balance Sheet.Variable Interest EntitiesWe make a determination at the start of each arrangement whether an entity in which we have made an investment is considered a Variable Interest Entity (“VIE”). We consolidate VIEs in which we have a controlling financial interest. If we do not have a controlling financial interest in a VIE, we account for the investment under either the equity or cost method.Impairment of Marketable and Non-Marketable SecuritiesWe periodically review our marketable and non-marketable securitiesinvestments for impairment. If we conclude that any of these investments are impaired, we determine whether such impairment is other-than-temporary. Factors we consider to make such determination include the duration and severity of the impairment, the reason for the decline in value and the potential recovery period and our intent to sell. For marketable debt securities, we also consider whether (1) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, and (2) the amortized cost basis cannot be recovered as a result of credit losses. If any impairment is considered other-than-temporary, we will write down the asset to its fair value and record the corresponding charge as interest and other income (expense), net.Accounts ReceivableWe record accounts receivable at the invoiced amount and we normally do not charge interest. We maintain an allowance for doubtful accounts to reserve for potentially uncollectible receivables. We review the accounts receivable by amounts due by customers which are past due to identify specific customers with known disputes or collectability issues. In determining the amount of the reserve, we make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. We also maintain a sales allowance to reserve for potential credits issued to customers. We determine the amount of the reserve based on historical credits issued.InventoriesInventories are stated at the lower of cost or market, computed using the first-in, first-out method.Property and EquipmentWe account for property and equipment at cost less accumulated depreciation and amortization. We compute depreciation using the straight-line method over the estimated useful lives of the assets, generally two to five years. We depreciate buildings over periods up to 25 years. We amortize leasehold improvements over the shorter of the remaining lease term or the estimated useful lives of the assets. Construction in progress is related to the construction or development of property (including land) and equipment that have not yet been placed in service for our intended use. Depreciation for equipment commences once it is placed in service and depreciation for buildings and leasehold improvements commences once they are ready for our intended use. Land is not depreciated.Software Development CostsWe expense software development costs, including costs to develop software products or the software component of products to be marketed to external users, before technological feasibility of such products is reached. We have determined that technologicalTechnological feasibility wasis typically reached shortly before the release of thosesuch products and as a result, the development costs incurred afterthat meet the establishment of technological feasibility and before the release of those productscriteria for capitalization were not material and accordingly, were expensed as incurred. for the periods presented.Software development costs also include costs to develop software programs to be used solely to meet internal needs and cloud based applications used to deliver our internal needs. Theservices. We capitalize development costs we incurred during the application development stage forrelated to these software programsapplications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended. Costs capitalized for developing such software applications were not material infor the yearsperiods presented.Business CombinationsWe include the results of operations of the businesses that we acquire as of the respective dates of acquisition. We allocate the fair value of the purchase price of our acquisitions to the tangible assets acquired and liabilities assumed and intangible assets acquired, based on their estimated fair values. The excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill.Long-Lived Assets Including Goodwill and Other Acquired Intangible AssetsWe review property and equipment, long-term prepayments and intangible assets, excluding goodwill, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be62Alphabet Inc. and Google Inc. recoverable. We measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows that the assets or the asset group are expected to generate. If property and equipment and intangiblethe assets are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. In 2014, we recorded impairments of intangible assets, including an impairment of $378 million in the third quarter of 2014 related to a patent licensing royalty asset. Impairments of intangible assets were not material in 2015.We have made no material adjustmentsallocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our long-lived assetsreporting units when changes in any of the years presented. In addition, weour operating structure occur, and if necessary, reassign goodwill using a relative fair value allocation approach. We test our goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that thisthe asset may be impaired. We found noNo goodwill impairment has been identified in any of the years presented.Intangible assets with definite lives are amortized over their estimated useful lives. We amortize our acquired intangible assets on a straight-line basis with definite lives over periods ranging from one to 12twelve years.Income TaxesWe recognizeaccount for income taxes using the asset and liability method, under which we recognize the liability method. We recognizeamount of taxes payable or refundable for the current year and deferred income taxes for differences between the financial reporting and tax bases of assets and liabilities at enacted statutory tax rates in effect for the yearsfuture tax consequences of events that have been recognized in which differences are expectedour financial statements or tax returns. We measure current and deferred tax assets and liabilities based on provisions of enacted tax law. We evaluate the realization of our deferred tax assets based on all available evidence and establish a valuation allowance to reverse. reduce deferred tax assets when it is more-likely-than-not that they will not be realized.We recognize the effect on deferred taxesfinancial statement effects of a change in tax rates in incomeposition when it is more-likely-than not that, based on technical merits, the position will be sustained upon examination. The tax benefits of the position recognized in the periodfinancial statements are then measured based on the largest amount of benefit that includesis greater than 50% likely to be realized upon settlement with a taxing authority. In addition, we recognize interest and penalties related to unrecognized tax benefits as a component of the enactment date.Foreign CurrencyGenerally, the functional currency of our international subsidiaries is the local currency. We translate the financial statements of these subsidiaries to U.S. dollars using month-end exchange rates of exchange for assets and liabilities, and average rates offor the annual period derived from month-end exchange rates for revenues, costs, and expenses. We record translation gains and losses in accumulated other comprehensive income as a component of stockholders’ equity. We recorded $124 million ofreflect net translation losses in 2010, $107 million of net translation losses in 2011, and $75 million of net translation gains in 2012. We record netforeign exchange transaction gains and losses resulting from foreign exchange transactionsthe conversion of the transaction currency to functional currency as a component of foreign currency exchange losses in interest and other income (expense), net. These gains and losses are net of those recognized on foreign exchange contracts. We recorded $29 million of net losses in 2010, $38 million of net losses in 2011, and $78 million of net losses in 2012.Advertising and Promotional ExpensesWe expense advertising and promotional costs in the period in which they are incurred. For the years ended December 31, 2010, 20112013, 2014 and 2012,2015, advertising and promotional expenses totaled approximately $772$2,389 million, $1,544$3,004 million, and $2,332$3,186 million.Recent Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09) "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. As currently issued and amended, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, though early adoption is permitted for annual reporting periods beginning after December 15, 2016. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements, implementing accounting system changes related to the adoption, and considering additional disclosure requirements.In June 2014, the FASB issued Accounting Standards Update No. 2014-10 (ASU 2014-10) "Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation." ASU 2014-10 removes the definition of a development stage entity from the Master Glossary of the Accounting Standards Codification (ASC) thereby removing the financial reporting distinction between development stage entities and other reporting entities. The additional elimination of related consolidation guidance will require companies with interests in development stage entities to reassess whether such entities are variable interest entities under ASC Topic 810, Consolidation. We will adopt this standard in the first quarter63Alphabet Inc. and Google Inc. of 2016 on a retrospective basis. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.In February 2015, the FASB issued Accounting Standards Update No. 2015-02 (ASU 2015-02) "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. We will adopt this standard in the first quarter of 2016 on a retrospective basis. We do not expect the adoption of this standard to have a material impact on our consolidated statement of operations or consolidated balance sheet, but it may result in additional disclosures.In November 2015, the FASB issued Accounting Standards Update No. 2015-17 (ASU 2015-17) “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”. ASU 2015-17 simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities and assets into current and noncurrent amounts in the consolidated balance sheet statement of financial position. The amendments in the update require that all deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods therein and may be applied either prospectively or retrospectively to all periods presented. Early adoption is permitted. We have early adopted this standard in the fourth quarter of 2015 on a retrospective basis. Prior periods have been retrospectively adjusted. As a result of the adoption of ASU 2015-17, the Company made the following adjustments to the 2014 balance sheet: a $1,322 million decrease to current deferred tax assets, a $83 million increase to noncurrent deferred tax asset, a $26 million decrease to current deferred tax liability, and a decrease of $1,213 million to noncurrent deferred tax liability.In January 2016, the FASB issued Accounting Standards Update No. 2016-01 (ASU 2016-01) "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. With respect to our consolidated financial statements, the most significant impact relates to the accounting for equity investments. It will impact the disclosure and presentation of financial assets and liabilities. ASU 2016-01 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2017. Early adoption by public entities is permitted only for certain provisions. We are currently in the process of evaluating the impact of the adoption of this standard on our consolidated financial statements.Revision of Previously Issued Financial StatementsIn the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities, and as a consequence, we revised our income tax expense for periods beginning in 2008 through the first quarter of 2015 in the cumulative amount of $711 million. We evaluated the materiality of the income tax expense impact quantitatively and qualitatively and concluded it was not material to any of the prior periods impacted and that correction of income tax expense as an out of period adjustment in the quarter ended June 30, 2015 would not be material to our consolidated financial statements for the year ending December 31, 2015. Consolidated revenues are not impacted. We elected to revise previously issued consolidated financial statements for the periods impacted. Refer to Note 17 for additional information.Prior Period ReclassificationPrior period balance related to inventories hasReclassificationsCertain amounts in prior periods have been reclassified to conform to thewith current yearperiod presentation.Note 2. Net Income Per Share of Class A and Class B Common StockWe compute net income per share of Class A and Class B common stock using the two-class method. Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and the effect of potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of stock options, warrants issued under the TSO program, and restricted stock units. The dilutive effect of outstanding stock options, warrants, and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net income per share of Class A common stock assumes the conversion of Class B common stock, while the diluted net income per share of Class B common stock does not assume the conversion of those shares.The rights, including the liquidation and dividend rights, of the holders of our Class A and Class B common stock are identical, except with respect to voting. Further, there are a number of safeguards built into our certificate of incorporation, as well as Delaware law, which preclude our board of directors from declaring or paying unequal per share dividends on our Class A and Class B common stock. Specifically, Delaware law provides that amendments to our certificate of incorporation which would have the effect of adversely altering the rights, powers, or preferences of a given class of stock (in this case the right of our Class A common stock to receive an equal dividend to any declared on our Class B common stock) must be approved by the class of stock adversely affected by the proposed amendment. In addition, our certificate of incorporation provides that before any such amendment may be put to a stockholder vote, it must be approved by the unanimous consent of our board of directors. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the year had been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Further, as we assume the conversion of Class B common stock in the computation of the diluted net income per share of Class A common stock, the undistributed earnings are equal to net income for that computation.The following table sets forth the computation of basic and diluted net income per share of Class A and Class B common stock (in millions, except share amounts which are reflected in thousands and per share amounts): Year Ended December 31, 2010 2011 2012 Class A Class B Class A Class B Class A Class B $ 6,569 $ 1,936 $ 7,658 $ 2,079 $ 8,641 $ 2,147 0 0 0 0 (41 ) (10 ) $ 6,569 $ 1,936 $ 7,658 $ 2,079 $ 8,600 $ 2,137 246,168 72,534 253,862 68,916 262,078 65,135 246,168 72,534 253,862 68,916 262,078 65,135 $ 26.69 $ 26.69 $ 30.17 $ 30.17 $ 32.97 $ 32.97 0 0 0 0 (0.16 ) (0.16 ) $ 26.69 $ 26.69 $ 30.17 $ 30.17 $ 32.81 $ 32.81 $ 6,569 $ 1,936 $ 7,658 $ 2,079 $ 8,641 $ 2,147 1,936 0 2,079 0 2,147 0 0 (26 ) 0 (27 ) 0 (31 ) $ 8,505 $ 1,910 $ 9,737 $ 2,052 $ 10,788 $ 2,116 $ 0 $ 0 $ 0 $ 0 $ (41 ) $ (10 ) 0 0 0 0 (10 ) 0 0 0 0 0 0 0 $ 0 $ 0 $ 0 $ 0 $ (51 ) $ (10 ) 246,168 72,534 253,862 68,916 262,078 65,135 72,534 0 68,916 0 65,135 0 3,410 71 2,958 46 2,944 34 1,139 0 1,478 0 2,148 0 323,251 72,605 327,214 68,962 332,305 65,169 26.31 26.31 29.76 29.76 32.46 32.46 0.00 0.00 0.00 0.00 (0.15 ) (0.15 ) $ 26.31 $ 26.31 $ 29.76 $ 29.76 $ 32.31 $ 32.31 The net income per share amounts are the same for Class A and Class B common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.Note 3.2. Financial InstrumentsFair Value MeasurementsWe measure our cash equivalents, marketable securities, and foreign currency and interest rate derivative contracts at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.Level 2—Include other inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings.Level 3—Unobservable inputs that are supported by little or no market activities.The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.Based on the fair value hierarchy, we classify our cash equivalents and marketable securities within Level 1 or Level 2. This is2 in the fair value hierarchy because we value our cash equivalents and marketable securities usinguse quoted market prices or alternative pricing sources and models utilizing market observable inputs.inputs to determine their fair value. We classify our foreign currency and interest rate derivative contracts primarily within Level 2 in the fair value hierarchy as the valuation inputs are based on quoted prices and market observable data of similar instruments.Cash, Cash Equivalents, and Marketable SecuritiesThe following tables summarize our cash, cash equivalents and marketable securities measured at adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment categories as of December 31, 20112014 and December 31, 20122015 (in millions): As of December 31, 2011 Adjusted
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value Cash and
Cash
Equivalents Marketable
Securities $ 4,712 $ 0 $ 0 $ 4,712 $ 4,712 $ 0 3,202 0 0 3,202 3,202 0 11,475 104 0 11,579 0 11,579 228 79 0 307 0 307 14,905 183 0 15,088 3,202 11,886 1,029 0 0 1,029 534 495 1,260 0 0 1,260 �� 1,260 0 6,486 15 0 6,501 275 6,226 1,608 32 (11 ) 1,629 0 1,629 1,775 19 0 1,794 0 1,794 6,023 187 (98 ) 6,112 0 6,112 6,359 147 (5 ) 6,501 0 6,501 24,540 400 (114 ) 24,826 2,069 22,757 $ 44,157 $ 583 $ (114 ) $ 44,626 $ 9,983 $ 34,643 As of December 31, 2012 Adjusted
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value Cash and
Cash
Equivalents Marketable
Securities $ 8,066 $ 0 $ 0 $ 8,066 $ 8,066 $ 0 5,221 0 0 5,221 5,221 0 10,853 77 (1 ) 10,929 0 10,929 12 88 0 100 0 100 16,086 165 (1 ) 16,250 5,221 11,029 984 0 0 984 562 422 929 0 0 929 929 0 1,882 20 0 1,902 0 1,902 1,996 81 (3 ) 2,074 0 2,074 2,249 23 (6 ) 2,266 0 2,266 7,200 414 (14 ) 7,600 0 7,600 7,039 136 (6 ) 7,169 0 7,169 847 1 0 848 0 848 23,126 675 (29 ) 23,772 1,491 22,281 $ 47,278 $ 840 $ (30 ) $ 48,088 $ 14,778 $ 33,310 64Alphabet Inc. and Google Inc. As of December 31, 2014 AdjustedCost GrossUnrealizedGains Gross
Unrealized
Losses Fair
Value Cash and
Cash
Equivalents Marketable
SecuritiesCash $ 9,863 $ 0 $ 0 $ 9,863 $ 9,863 $ 0 Level 1: Money market and other funds 2,532 0 0 2,532 2,532 0 U.S. government notes 15,320 37 (4 ) 15,353 1,128 14,225 Marketable equity securities 988 428 (64 ) 1,352 0 1,352 18,840 465 (68 ) 19,237 3,660 15,577 Level 2: Time deposits(1) 2,409 0 0 2,409 2,309 100 Money market and other funds(2) 1,762 0 0 1,762 1,762 0 Fixed-income bond funds(3) 385 0 (38 ) 347 0 347 U.S. government agencies 2,327 8 (1 ) 2,334 750 1,584 Foreign government bonds 1,828 22 (10 ) 1,840 0 1,840 Municipal securities 3,370 33 (6 ) 3,397 3 3,394 Corporate debt securities 11,499 114 (122 ) 11,491 0 11,491 Agency mortgage-backed securities 8,196 109 (42 ) 8,263 0 8,263 Asset-backed securities 3,456 1 (5 ) 3,452 0 3,452 35,232 287 (224 ) 35,295 4,824 30,471 Total $ 63,935 $ 752 $ (292 ) $ 64,395 $ 18,347 $ 46,048 As of December 31, 2015 AdjustedCost GrossUnrealizedGains Gross
Unrealized
Losses Fair
Value Cash andCashEquivalents Marketable
SecuritiesCash $ 7,380 $ 0 $ 0 $ 7,380 $ 7,380 $ 0 Level 1: Money market and other funds 5,623 0 0 5,623 5,623 0 U.S. government notes 20,922 27 (48 ) 20,901 258 20,643 Marketable equity securities 692 155 0 847 0 847 27,237 182 (48 ) 27,371 5,881 21,490 Level 2: Time deposits(1) 3,223 0 0 3,223 2,012 1,211 Money market and other funds(2) 1,140 0 0 1,140 1,140 0 Fixed-income bond funds(3) 219 0 0 219 0 219 U.S. government agencies 1,367 2 (3 ) 1,366 0 1,366 Foreign government bonds 2,242 14 (23 ) 2,233 0 2,233 Municipal securities 3,812 47 (4 ) 3,855 0 3,855 Corporate debt securities 13,809 53 (278 ) 13,584 136 13,448 Agency mortgage-backed securities 9,680 48 (57 ) 9,671 0 9,671 Asset-backed securities 3,032 0 (8 ) 3,024 0 3,024 38,524 164 (373 ) 38,315 3,288 35,027 Total $ 73,141 $ 346 $ (421 ) $ 73,066 $ 16,549 $ 56,517 (1) (2)The balances atas of December 31, 20112014 and December 31, 20122015 were related to cash collateral received in connection with our securities lending program, which was invested in reverse repurchase agreements maturing within three months. See section titled "Securities Lending Program" below for further discussion onof this program.(3)Fixed-income bond funds consist of mutual funds that primarily invest in corporate and government bonds. We determine realized gains or losses on the sale of marketable securities on a specific identification method. We recognized gross realized gains of $381$416 million, $238 million, and $383$357 million for the years ended December 31, 201165Alphabet Inc. and Google Inc. 2013, 2014, and December 31, 2012.2015. We recognized gross realized losses of $127$258 million, $85 million, and $101$565 million for the years ended December 31, 20112013, 2014, and December 31, 2012. In 2011, we also recorded an other-than-temporary impairment charge of $88 million related to our investment in Clearwire Corporation.2015. We reflect these gains and losses as a component of interest and other income (expense), net, in ourthe accompanying Consolidated Statements of Income.The following table summarizes the estimated fair value of our investments in marketable debt securities, excluding marketable equity securities, designatedaccounted for as available-for-sale securities and classified by the contractual maturity date of the securities (in millions): As of
December 31,
2012 $ 4,708 12,310 7,296 8,896 $ 33,210 As of December 31, 2015 Due in 1 year $ 7,900 Due in 1 year through 5 years 30,141 Due in 5 years through 10 years 7,199 Due after 10 years 10,211 Total $ 55,451 The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of December 31, 20112014 and December 31, 2012,2015, 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, 2011 Less than 12 Months 12 Months or Greater Total Fair Value Unrealized
Loss Fair Value Unrealized
Loss Fair Value Unrealized
Loss $ 302 $ (11 ) $ 6 $ 0 $ 308 $ (11 ) 2,160 (97 ) 17 (1 ) 2,177 (98 ) 716 (3 ) 19 (2 ) 735 (5 ) $ 3,178 $ (111 ) $ 42 $ (3 ) $ 3,220 $ (114 ) As of December 31, 2012 Less than 12 Months 12 Months or Greater Total Fair Value Unrealized
Loss Fair Value Unrealized
Loss Fair Value Unrealized
Loss $ 842 $ (1 ) $ 0 $ 0 $ 842 $ (1 ) 509 (2 ) 12 (1 ) 521 (3 ) 686 (6 ) 9 0 695 (6 ) 820 (10 ) 81 (4 ) 901 (14 ) 1,300 (6 ) 0 0 1,300 (6 ) $ 4,157 $ (25 ) $ 102 $ (5 ) $ 4,259 $ (30 ) As of December 31, 2014 Less than 12 Months 12 Months or Greater Total Fair Value Unrealized
Loss Fair Value Unrealized
Loss Fair Value Unrealized
LossU.S. government notes $ 4,490 $ (4 ) $ 0 $ 0 $ 4,490 $ (4 ) U.S. government agencies 830 (1 ) 0 0 830 (1 ) Foreign government bonds 255 (7 ) 43 (3 ) 298 (10 ) Municipal securities 877 (3 ) 174 (3 ) 1,051 (6 ) Corporate debt securities 5,851 (112 ) 225 (10 ) 6,076 (122 ) Agency mortgage-backed securities 609 (1 ) 2,168 (41 ) 2,777 (42 ) Asset-backed securities 2,388 (4 ) 174 (1 ) 2,562 (5 ) Fixed-income bond funds 347 (38 ) 0 0 347 (38 ) Marketable equity securities 690 (64 ) 0 0 690 (64 ) Total $ 16,337 $ (234 ) $ 2,784 $ (58 ) $ 19,121 $ (292 ) As of December 31, 2015 Less than 12 Months 12 Months or Greater Total Fair Value UnrealizedLoss Fair Value UnrealizedLoss Fair Value Unrealized
LossU.S. government notes $ 13,757 $ (48 ) $ 0 $ 0 $ 13,757 $ (48 ) U.S. government agencies 864 (3 ) 0 0 864 (3 ) Foreign government bonds 885 (18 ) 36 (5 ) 921 (23 ) Municipal securities 1,116 (3 ) 41 (1 ) 1,157 (4 ) Corporate debt securities 9,192 (202 ) 784 (76 ) 9,976 (278 ) Agency mortgage-backed securities 5,783 (34 ) 721 (23 ) 6,504 (57 ) Asset-backed securities 2,508 (7 ) 386 (1 ) 2,894 (8 ) Total $ 34,105 $ (315 ) $ 1,968 $ (106 ) $ 36,073 $ (421 ) During the years ended December 31, 2013 and 2014, we did not recognize any other-than-temporary impairment loss. During the year ended December 31, 2015, we recognized $281 million of other-than-temporary impairment losses related to our marketable equity securities and fixed-income bond funds. Those losses are included in gains (losses) on marketable securities, net as a component of other income (expense), net, in the accompanying Consolidated Statements of Income. See Note 10 for further details on other income (expense), net.Securities Lending Program66Alphabet Inc. and Google Inc. From time to time, we enter into securities lending agreements with financial institutions to enhance investment income. We loan selectedcertain securities which are secured by collateralcollateralized in the form of cash or securities. Cash collateral is usually invested in reverse repurchase agreements. agreements which are collateralized in the form of securities.We classify loaned securities as cash equivalents or marketable securities on the accompanying Consolidated Balance Sheets. Weand record the cash collateral as an asset with a corresponding liability.liability in the accompanying Consolidated Balance Sheets. We classify reverse repurchase agreements maturing within three months as cash equivalents and those longer than three months as receivable under reverse repurchase agreements onin the accompanying Consolidated Balance Sheets. For lending agreements collateralized by securities,security collateral received, we do not record an asset or liability except in the event of counterparty default.Our securities lending transactions were accounted for as we are not permitted to sell or repledge the associated collateral. As of December 31, 2015 Remaining Contractual Maturity of the Agreements Securities Lending Transactions Overnight and Continuous Up to 30 days 30 - 90 Days Greater Than 90 Days Total U.S. government notes $ 1,322 $ 31 $ 0 $ 306 $ 1,659 U.S. government agencies 504 77 0 0 581 Corporate debt securities 188 0 0 0 188 Total $ 2,014 $ 108 $ 0 $ 306 $ 2,428 Gross amount of recognized liabilities for securities lending in offsetting disclosure $ 2,428 Amounts related to agreements not included in securities lending in offsetting disclosure $ 0 Derivative Financial InstrumentsWe recognize derivative instruments as either assets or liabilities in the accompanying Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives in the accompanying Consolidated Statements of Income as other income (expense), net, as part of revenues, or as a component of accumulated other comprehensive income (AOCI) in the accompanying Consolidated Balance Sheets, as discussed below.We enter into foreign currency contracts with financial institutions to reduce the risk that our cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. We use certain interest rate derivative contracts to hedge interest rate exposures on our fixed income securities and our anticipated debt issuance.debt. Our program is not designatedused for trading or speculative purposes.We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same company.counterparty. To further reduce credit risk, we enter into collateral security arrangements thatunder which the counterparty is required to provide for collateral to be received when the net fair value of certain financial instruments fluctuates from contractually established thresholds. We present our derivative assets and derivative liabilities at their gross fair values. At can take possession of the collateral in the event of counterparty default. As of December 31, 20112014 and December 31, 2012,2015, we received cash collateral related to the derivative instruments under our collateral security arrangements of $113$268 million and $43 million, which are recorded as accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets.We recognize derivative instruments as either assets or liabilities on the accompanying Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives in the accompanying Consolidated Statements of Income as interest and other income, net, as part of revenues, or to accumulated other comprehensive income (AOCI) in the accompanying Consolidated Balance Sheets.Cash Flow HedgesWe use options designated as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the U.S. dollar. The notional principal of these contracts was approximately $6.5$13.6 billion and $9.5$16.4 billion as of December 31, 20112014 and December 31, 2012.2015. These foreign exchange contracts have maturities of 36 months or less.During the second quarter ofIn 2012, we began to hedge the variability of forecasted interest payments on an anticipated debt issuance usingentered into forward-starting interest swaps. Therate swaps with a total notional amount of these forward-starting interest swaps was $1.0 billion as of December 31, 2012 withand terms calling for us to receive interest at a variable rate and to pay interest at a fixed rate. These forward-starting interest swapsrate, that effectively fix the benchmarklocked in an interest rate on anour anticipated debt issuance of $1.0 billion in 2014. We issued $1.0 billion of unsecured senior notes in February 2014 and they will be(See details in Note 4). As a result, we terminated the forward-starting interest rate swaps upon issuancethe debt issuance. The cash gain associated with the termination is reported within Operating Activities in the Consolidated Statement of Cash Flows for the year ended December 31, 2014, consistent with the impact of the debt.We initially report anyreflect gain or loss on the effective portion of a cash flow hedge as a component of AOCI and subsequently reclassify cumulative gains and losses to revenues or interest expense when the hedged transactions are recorded. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI would be immediately reclassified to interest and other income (expense), net. Further, we exclude the change in the time value of the options from our67Alphabet Inc. and Google Inc. assessment of hedge effectiveness. We record the premium paid or time value of an option on the date of purchase as an asset. Thereafter, we recognize any changechanges to this time value in interest and other income (expense), net.As of December 31, 2012,2015, the effective portion of our cash flow hedges before tax effect was $11 million, $10$375 million, of which $293 million is expected to be reclassified from AOCI to revenuesinto earnings within the next 12 months.Fair Value HedgesWe use forward contracts designated as fair value hedges to hedge foreign currency risks for our investments denominated in currencies other than the U.S. dollar. Gains and losses on these contracts are recognized in interest and other income, net, along with the offsetting losses and gains of the related hedged items. We exclude changes in the time value for forward contracts from the assessment of hedge effectiveness and recognize them in interest and other income, net.effectiveness. The notional principal of these contracts was $1.0$1.5 billion and $1.1$1.8 billion as of December 31, 20112014 and 2015.We use interest rate swaps designated as fair value hedges to hedge interest rate risk for certain fixed rate securities. The notional principal of these contracts was $175 million and $295 million as of December 31, 2012.Gains and losses on these forward contracts and interest rate swaps are recognized in other income (expense), net, along with the offsetting losses and gains of the related hedged items.Other DerivativesOther derivatives not designated as hedging instruments consist of forward and option contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the local currency of a subsidiary. We recognize gains and losses on these contracts, as well as the related costs in interest and other income (expense), net, along with the foreign currency gains and losses of the related hedged items.on monetary assets and liabilities. The notional principal of foreign exchange contracts outstanding was $3.7$6.2 billion and $6.6$7.5 billion at as of December 31, 20112014 and December 31, 2012.We also use exchange-traded interest rate futures contracts and “To Be Announced” (TBA) forward purchase commitments of mortgage-backed assets to hedge interest rate risks on certain fixed income securities. The TBA contracts meet the definition of derivative instruments in cases where physical delivery of the assets is not taken at the earliest available delivery date. Our interest rate futures and TBA contracts (together interest rate contracts) are not designated as hedging instruments. We recognize gains and losses on these contracts, as well as the related costs, in interest and other income (expense), net. The gains and losses are generally economically offset by unrealized gains and losses in the underlying available-for-sale securities, which are recorded as a component of AOCI until the securities are sold or other-than-temporarily impaired, at which time the amounts are moved from AOCI into interest and other income (expense), net. The total notional amounts of interest rate contracts outstanding were $100$150 million and $25$50 million at as of December 31, 20112014 and December, 31, 2012.68Alphabet Inc. and Google Inc. The fair values of our outstanding derivative instruments were as follows (in millions): As of December 31, 2011 Fair Value of
Derivatives
Designated as
Hedging Instruments Fair Value of
Derivatives Not
Designated as
Hedging Instruments Total Fair
Value Prepaid revenue share, expenses and other assets, current and non-current $ 333 $ 4 $ 337 Accrued expenses and other current liabilities $ 5 $ 1 $ 6 As of December 31, 2012 Fair Value of
Derivatives
Designated as
Hedging Instruments Fair Value of
Derivatives Not
Designated as
Hedging Instruments Total Fair
Value Prepaid revenue share, expenses and other assets, current and non-current $ 164 $ 13 $ 177 Prepaid revenue share, expenses and other assets, current and non-current 1 0 1 $ 165 $ 13 $ 178 Accrued expenses and other current liabilities $ 3 $ 4 $ 7 As of December 31, 2014 Balance Sheet Location Fair Value of
Derivatives
Designated as
Hedging Instruments Fair Value of
Derivatives Not
Designated as
Hedging Instruments Total Fair
ValueDerivative Assets: Level 2: Foreign exchange contracts Prepaid revenue share, expenses and other assets, current and non-current $ 851 $ 0 $ 851 Interest rate contracts Prepaid revenue share, expenses and other assets, current and non-current 1 0 1 Total $ 852 $ 0 $ 852 Derivative Liabilities: Level 2: Foreign exchange contracts Accrued expenses and other current liabilities $ 0 $ 3 $ 3 Interest rate contracts Accrued expenses and other liabilities, current and non-current 1 0 1 Total $ 1 $ 3 $ 4 As of December 31, 2015 Balance Sheet Location Fair Value of
Derivatives
Designated as
Hedging Instruments Fair Value of
Derivatives Not
Designated as
Hedging Instruments Total Fair
ValueDerivative Assets: Level 2: Foreign exchange contracts Prepaid revenue share, expenses and other assets, current and non-current $ 626 $ 2 $ 628 Total $ 626 $ 2 $ 628 Derivative Liabilities: Level 2: Foreign exchange contracts Accrued expenses and other current liabilities $ 1 $ 13 $ 14 Interest rate contracts Accrued expenses and other liabilities, current and non-current 2 0 2 Total $ 3 $ 13 $ 16 69Alphabet Inc. and Google Inc. The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income (OCI) is summarized below (in millions): Gains Recognized in OCI
on Derivatives Before Tax Effect (Effective Portion) Year Ended December 31, 2010 2011 2012 $ 331 $ 54 $ 73 0 0 1 $ 331 $ 54 $ 74 Gains Reclassified from AOCI into Income (Effective Portion) Year Ended December 31, Location 2010 2011 2012 Revenues $ 203 $ 43 $ 217 Losses Recognized in Income on Derivatives (Amount
Excluded from Effectiveness Testing and Ineffective Portion)(1) Year Ended December 31, Location 2010 2011 2012 Interest and
other income, net $ (320 ) $ (323 ) $ (447 ) Gains (Losses) Recognized in OCIon Derivatives Before Tax Effect (Effective Portion) Year Ended December 31, Derivatives in Cash Flow Hedging Relationship 2013 2014 2015 Foreign exchange contracts $ 92 $ 929 $ 964 Interest rate contracts 86 (31 ) 0 Total $ 178 $ 898 $ 964 Gains Reclassified from AOCI into Income (Effective Portion) Year Ended December 31, Derivatives in Cash Flow Hedging Relationship Location 2013 2014 2015 Foreign exchange contracts Revenues $ 95 $ 171 $ 1,399 Interest rate contracts Other income (expense), net 0 4 5 Total $ 95 $ 175 $ 1,404 Gains (Losses) Recognized in Income on Derivatives (AmountExcluded from Effectiveness Testing and Ineffective Portion) (1) Year Ended December 31, Derivatives in Cash Flow Hedging Relationship Location 2013 2014 2015 Foreign exchange contracts Other income (expense), net $ (280 ) $ (279 ) $ (297 ) Interest rate contracts Other income (expense), net 0 4 0 Total $ (280 ) $ (275 ) $ (297 ) (1)
| Gains (Losses) Recognized in Income on Derivatives(2) | ||||||||||||||
| Year Ended December 31, | ||||||||||||||
Derivatives in Fair Value Hedging Relationship | Location | 2010 | 2011 | 2012 | ||||||||||
Foreign exchange contracts | Interest and other income, net | $ | (35 | ) | $ | (2 | ) | $ | (31 | ) | ||||
Hedged item | Interest and other income, net | 29 | (12 | ) | 23 | |||||||||
|
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|
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| |||||||||
Total | $ | (6 | ) | $ | (14 | ) | $ | (8 | ) | |||||
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| |||||||||
Gains (Losses) Recognized in Income on Derivatives(2) | ||||||||||||||
| Year Ended December 31, | ||||||||||||||
| Derivatives in Fair Value Hedging Relationship | Location | 2013 | 2014 | 2015 | ||||||||||
| Foreign Exchange Hedges: | ||||||||||||||
| Foreign exchange contracts | Other income (expense), net | $ | 16 | $ | 115 | $ | 170 | |||||||
| Hedged item | Other income (expense), net | (25 | ) | (123 | ) | (176 | ) | |||||||
| Total | $ | (9 | ) | $ | (8 | ) | $ | (6 | ) | |||||
| Interest Rate Hedges: | ||||||||||||||
| Interest rate contracts | Other income (expense), net | $ | 0 | $ | 0 | $ | (2 | ) | ||||||
| Hedged item | Other income (expense), net | 0 | 0 | 2 | ||||||||||
| Total | $ | 0 | $ | 0 | $ | 0 | ||||||||
(2) | Losses related to the amount excluded from effectiveness testing of the hedges were |
| Alphabet Inc. and Google Inc. | |
| Gains (Losses) Recognized in Income on Derivatives | ||||||||||||||
| Year Ended December 31, | ||||||||||||||
Derivatives Not Designated As Hedging Instruments | Location | 2010 | 2011 | 2012 | ||||||||||
Foreign exchange contracts | Interest and other income, net | $ | (40 | ) | $ | 29 | $ | (67 | ) | |||||
Interest rate contracts | Interest and other income, net | 0 | (19 | ) | (6 | ) | ||||||||
|
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| |||||||||
Total | $ | (40 | ) | $ | 10 | $ | (73 | ) | ||||||
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| Gains (Losses) Recognized in Income on Derivatives | ||||||||||||||
| Year Ended December 31, | ||||||||||||||
| Derivatives Not Designated As Hedging Instruments | Location | 2013 | 2014 | 2015 | ||||||||||
| Foreign exchange contracts | Other income (expense), net, and net loss from discontinued operations | $ | 118 | $ | 237 | $ | 198 | |||||||
| Interest rate contracts | Other income (expense), net | 4 | 2 | 1 | ||||||||||
| Total | $ | 122 | $ | 239 | $ | 199 | ||||||||
| Offsetting of Assets | |||||||||||||||||||||||||||
| As of December 31, 2014 | |||||||||||||||||||||||||||
| Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | |||||||||||||||||||||||||||
| Description | Gross Amounts of Recognized Assets | Gross Amounts Offset in the Consolidated Balance Sheets | Net Presented in the Consolidated Balance Sheets | Financial Instruments | Cash Collateral Received | Non-Cash Collateral Received | Net Assets Exposed | ||||||||||||||||||||
| Derivatives | $ | 852 | $ | 0 | $ | 852 | $ | (1 | ) | (1) | $ | (251 | ) | $ | (412 | ) | $ | 188 | |||||||||
| Reverse repurchase agreements | 2,637 | 0 | 2,637 | (2) | 0 | 0 | (2,637 | ) | 0 | ||||||||||||||||||
| Total | $ | 3,489 | $ | 0 | $ | 3,489 | $ | (1 | ) | $ | (251 | ) | $ | (3,049 | ) | $ | 188 | ||||||||||
| As of December 31, 2015 | |||||||||||||||||||||||||||
| Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | |||||||||||||||||||||||||||
| Description | Gross Amounts of Recognized Assets | Gross Amounts Offset in the Consolidated Balance Sheets | Net Presented in the Consolidated Balance Sheets | Financial Instruments | Cash Collateral Received | Non-Cash Collateral Received | Net Assets Exposed | ||||||||||||||||||||
| Derivatives | $ | 628 | $ | 0 | $ | 628 | $ | (13 | ) | (1) | $ | (189 | ) | $ | (214 | ) | $ | 212 | |||||||||
| Reverse repurchase agreements | 1,590 | 0 | 1,590 | (2) | 0 | 0 | (1,590 | ) | 0 | ||||||||||||||||||
| Total | $ | 2,218 | $ | 0 | $ | 2,218 | $ | (13 | ) | $ | (189 | ) | $ | (1,804 | ) | $ | 212 | ||||||||||
(1) | The balances as of December 31, 2014 and 2015 were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with our master netting agreements. |
(2) | The balances as of December 31, 2014 and 2015 included $1,762 million and $1,140 million recorded in cash and cash equivalents, respectively, and $875 million and $450 million recorded in receivable under reverse repurchase agreements, respectively. |
| Alphabet Inc. and Google Inc. | |
| Offsetting of Liabilities | |||||||||||||||||||||||||||
| As of December 31, 2014 | |||||||||||||||||||||||||||
| Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | |||||||||||||||||||||||||||
| Description | Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Consolidated Balance Sheets | Net Presented in the Consolidated Balance Sheets | Financial Instruments | Cash Collateral Pledged | Non-Cash Collateral Pledged | Net Liabilities | ||||||||||||||||||||
| Derivatives | $ | 4 | $ | 0 | $ | 4 | $ | (1 | ) | (3) | $ | 0 | $ | 0 | $ | 3 | |||||||||||
| Securities lending agreements | 2,778 | 0 | 2,778 | 0 | 0 | (2,740 | ) | 38 | |||||||||||||||||||
| Total | $ | 2,782 | $ | 0 | $ | 2,782 | $ | (1 | ) | $ | 0 | $ | (2,740 | ) | $ | 41 | |||||||||||
| As of December 31, 2015 | |||||||||||||||||||||||||||
| Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | |||||||||||||||||||||||||||
| Description | Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Consolidated Balance Sheets | Net Presented in the Consolidated Balance Sheets | Financial Instruments | Cash Collateral Pledged | Non-Cash Collateral Pledged | Net Liabilities | ||||||||||||||||||||
| Derivatives | $ | 16 | $ | 0 | $ | 16 | $ | (13 | ) | (3) | $ | (3 | ) | $ | 0 | $ | 0 | ||||||||||
| Securities lending agreements | 2,428 | 0 | 2,428 | 0 | 0 | (2,401 | ) | 27 | |||||||||||||||||||
| Total | $ | 2,444 | $ | 0 | $ | 2,444 | $ | (13 | ) | $ | (3 | ) | $ | (2,401 | ) | $ | 27 | ||||||||||
(3) | The balances as of December 31, 2014 and 2015 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements. |
| Alphabet Inc. and Google Inc. | |
| Level 3 | |||
| Balance as of December 31, 2014 | $ | 90 | |
Purchases, issuances, and settlements(1) | 934 | ||
| Balance as of December 31, 2015 | $ | 1,024 | |
(1) | Purchases of securities included our $900 million investment in SpaceX, a space exploration and space transport company, made during January 2015. |
Additionally, as of December 31, 2011, we had a $468 million secured promissory note outstanding recorded as short-term debt, with an interest rate of 1.0% that matured2014 and was paid in December 2012.
2015. The estimated fair value of the short-term debt approximated its carrying value atas of December 31, 20112014 and December 31, 2012.
2015.
| Alphabet Inc. and Google Inc. | |
In May 2011, we
| Outstanding Balance as of December 31, 2011 | Outstanding Balance as of December 31, 2012 | |||||||
1.25% Notes due on May 19, 2014 | $ | 1,000 | $ | 1,000 | ||||
2.125% Notes due on May 19, 2016 | 1,000 | 1,000 | ||||||
3.625% Notes due on May 19, 2021 | 1,000 | 1,000 | ||||||
Unamortized discount for the Notes above | (14 | ) | (12 | ) | ||||
|
|
|
| |||||
Total | $ | 2,986 | $ | 2,988 | ||||
|
|
|
| |||||
| As of December 31, 2014 | As of December 31, 2015 | ||||||
| Short-Term Portion of Long-Term Debt | |||||||
| 2.125% Notes due on May 19, 2016 | $ | 0 | $ | 1,000 | |||
| Capital Lease Obligation | 10 | 225 | |||||
| Total Short-Term Portion of Long-Term Debt | $ | 10 | $ | 1,225 | |||
| Long-Term Debt | |||||||
| 2.125% Notes due on May 19, 2016 | $ | 1,000 | $ | 0 | |||
| 3.625% Notes due on May 19, 2021 | 1,000 | 1,000 | |||||
| 3.375% Notes due on February 25, 2024 | 1,000 | 1,000 | |||||
| Unamortized discount for the Notes above | (8 | ) | (5 | ) | |||
| Subtotal | 2,992 | 1,995 | |||||
| Capital Lease Obligation | 236 | 0 | |||||
| Total Long-Term Debt | $ | 3,228 | $ | 1,995 | |||
At
Years ending | ||||
2013 | 0 | |||
2014 | 1,000 | |||
2015 | 0 | |||
2016 | 1,000 | |||
Thereafter | 1,000 | |||
|
| |||
Total | $ | 3,000 | ||
|
| |||
| Years Ending | ||||
| 2016 | $ | 1,225 | ||
| 2017 | 0 | |||
| 2018 | 0 | |||
| 2019 | 0 | |||
| Thereafter | 2,000 | |||
| Total | $ | 3,225 | ||
| Alphabet Inc. and Google Inc. | |
Inventories
Inventories
| As of December 31, 2011 | As of December 31, 2012 | |||||||
Raw materials and work in process | $ | 0 | $ | 77 | ||||
Finished goods | 35 | 428 | ||||||
|
|
|
| |||||
Inventories | $ | 35 | $ | 505 | ||||
|
|
|
| |||||
| As of December 31, 2014 | As of December 31, 2015 | ||||||
| Land and buildings | $ | 13,326 | $ | 16,518 | |||
| Information technology assets | 10,918 | 13,645 | |||||
| Construction in progress | 6,555 | 7,324 | |||||
| Leasehold improvements | 1,868 | 2,576 | |||||
| Furniture and fixtures | 79 | 83 | |||||
| Property and equipment, gross | 32,746 | 40,146 | |||||
| Less: accumulated depreciation and amortization | (8,863 | ) | (11,130 | ) | |||
| Property and equipment, net | $ | 23,883 | $ | 29,016 | |||
Propertybuildings as of December 31, 2015.
| As of December 31, 2011 | As of December 31, 2012 | |||||||
Information technology assets | $ | 6,060 | $ | 7,717 | ||||
Land and buildings | 5,228 | 6,257 | ||||||
Construction in progress | 2,128 | 2,240 | ||||||
Leasehold improvements | 919 | 1,409 | ||||||
Furniture and fixtures | 65 | 74 | ||||||
|
|
|
| |||||
Total | 14,400 | 17,697 | ||||||
Less: accumulated depreciation and amortization | 4,797 | 5,843 | ||||||
|
|
|
| |||||
Property and equipment, net | $ | 9,603 | $ | 11,854 | ||||
|
|
|
| |||||
| As of December 31, 2014 | As of December 31, 2015 | ||||||
| Principal of the Note Receivable | $ | 1,500 | $ | 1,448 | |||
| Less: unamortized discount for the Note Receivable | (175 | ) | (112 | ) | |||
| Total | $ | 1,325 | $ | 1,336 | |||
| As of December 31, 2011 | As of December 31, 2012 | |||||||
Foreign currency translation adjustment | $ | (148 | ) | $ | (73 | ) | ||
Net unrealized gains on available-for-sale investments, net of taxes | 327 | 604 | ||||||
Unrealized gains on cash flow hedges, net of taxes | 97 | 7 | ||||||
|
|
|
| |||||
Accumulated other comprehensive income | $ | 276 | $ | 538 | ||||
|
|
|
| |||||
| Foreign Currency Translation Adjustments | Unrealized Gains (Losses) on Available-for-Sale Investments | Unrealized Gains on Cash Flow Hedges | Total | ||||||||||||
| Balance as of December 31, 2012 | $ | (73 | ) | $ | 604 | $ | 7 | $ | 538 | ||||||
| Other comprehensive income (loss) before reclassifications | 89 | (392 | ) | 112 | (191 | ) | |||||||||
| Amounts reclassified from AOCI | 0 | (162 | ) | (60 | ) | (222 | ) | ||||||||
| Other comprehensive income (loss) | 89 | (554 | ) | 52 | (413 | ) | |||||||||
| Balance as of December 31, 2013 | $ | 16 | $ | 50 | $ | 59 | $ | 125 | |||||||
| Alphabet Inc. and Google Inc. | |
| Foreign Currency Translation Adjustments | Unrealized Gains (Losses) on Available-for-Sale Investments | Unrealized Gains on Cash Flow Hedges | Total | ||||||||||||
| Balance as of December 31, 2013 | $ | 16 | $ | 50 | $ | 59 | $ | 125 | |||||||
| Other comprehensive income (loss) before reclassifications | (996 | ) | 505 | 651 | 160 | ||||||||||
| Amounts reclassified from AOCI | 0 | (134 | ) | (124 | ) | (258 | ) | ||||||||
| Other comprehensive income (loss) | (996 | ) | 371 | 527 | (98 | ) | |||||||||
| Balance as of December 31, 2014 | $ | (980 | ) | $ | 421 | $ | 586 | $ | 27 | ||||||
| Foreign Currency Translation Adjustments | Unrealized Gains (Losses) on Available-for-Sale Investments | Unrealized Gains on Cash Flow Hedges | Total | ||||||||||||
| Balance as of December 31, 2014 | $ | (980 | ) | $ | 421 | $ | 586 | $ | 27 | ||||||
| Other comprehensive income (loss) before reclassifications | (1,067 | ) | (715 | ) | 676 | (1,106 | ) | ||||||||
| Amounts reclassified from AOCI | 0 | 208 | (1,003 | ) | (795 | ) | |||||||||
| Other comprehensive income (loss) | (1,067 | ) | (507 | ) | (327 | ) | (1,901 | ) | |||||||
| Balance as of December 31, 2015 | $ | (2,047 | ) | $ | (86 | ) | $ | 259 | $ | (1,874 | ) | ||||
| Gains (Losses) Reclassified from AOCI to the Consolidated Statement of Income | ||||||||||||||
| Year Ended December 31, | ||||||||||||||
| AOCI Components | Location | 2013 | 2014 | 2015 | ||||||||||
| Unrealized gains (losses) on available-for-sale investments | ||||||||||||||
| Other income (expense), net | $ | 158 | $ | 153 | $ | (208 | ) | |||||||
| Net Income (loss) from discontinued operations | 43 | 0 | 0 | |||||||||||
| Provision for income taxes | (39 | ) | (19 | ) | 0 | |||||||||
| Net of tax | $ | 162 | $ | 134 | $ | (208 | ) | |||||||
| Unrealized gains on cash flow hedges | ||||||||||||||
| Foreign exchange contracts | Revenue | $ | 95 | $ | 171 | $ | 1,399 | |||||||
| Interest rate contracts | Other income (expense), net | 0 | 4 | 5 | ||||||||||
| Provision for income taxes | (35 | ) | (51 | ) | (401 | ) | ||||||||
| Net of tax | $ | 60 | $ | 124 | $ | 1,003 | ||||||||
| Total amount reclassified, net of tax | $ | 222 | $ | 258 | $ | 795 | ||||||||
On May 22, 2012,
| Alphabet Inc. and Google Inc. | |
The fair value of assets acquired and liabilities assumed was based upon a preliminary valuation and our estimates and assumptions are subject to change within the measurement period. The primary areas of the purchase price that are not yet finalized are related to certain legal matters, income taxes, and residual goodwill. Of the $12.4 billion total purchase price, $2.9 billion was cash acquired, $5.5 billion$59 million was attributed to patents and developed technology, $2.5 billionintangible assets, $206 million was attributed to goodwill, $0.7 billionand $21 million was attributed to customer relationships, and $0.8 billion to other net assets acquired.
liabilities assumed. The goodwill of $2.5 billion$206 million is primarily attributedattributable to the synergies expected to arise after the acquisition. Goodwill is not expected to be deductible for tax purposes.
Supplemental information on an unaudited pro forma basis, as if the Motorola acquisition had been consummated on January 1, 2011, is presented as follows (in millions, except per share amounts):
| Year Ended December 31, | ||||||||
| 2011 | 2012 | |||||||
Revenues(1) | $ | 47,294 | $ | 53,656 | ||||
Net income | 8,792 | 10,583 | ||||||
Net income per share of Class A and Class B common stock—diluted | 26.83 | 31.82 | ||||||
|
These pro forma results are based on estimates and assumptions, which we believe are reasonable. They are not necessarily indicative of our consolidated results of operations in future periods or the results that actually would have been realized had we been a combined company during the periods presented. The pro forma results include adjustments primarily related to amortization of acquired intangible assets, severance and benefit arrangements in connection with the acquisition, and stock-based compensation expenses for assumed unvested stock options and restricted stock units.
| Alphabet Inc. and Google Inc. | |
Balance as of December 31, 2011 | $ | 7,346 | ||
Goodwill acquired | 3,230 | |||
Goodwill adjustment | (39 | ) | ||
|
| |||
Balance as of December 31, 2012 | $ | 10,537 | ||
|
|
Amounts of goodwill allocated to the Mobile and Home segments were not material. See Note 15 for further discussion of segment information.
| Alphabet Inc. and Google Inc. | |
| Other Bets | Total Consolidated | ||||||||||
| Balance as of December 31, 2013 | $ | 11,492 | $ | — | $ | 11,492 | |||||
| Acquisitions | 4,208 | — | 4,208 | ||||||||
| Dispositions | (43 | ) | — | (43 | ) | ||||||
| Foreign currency translation and other adjustments | (58 | ) | — | (58 | ) | ||||||
| Balance as of December 31, 2014 | $ | 15,599 | $ | — | $ | 15,599 | |||||
| Acquisitions | 139 | — | 139 | ||||||||
| Foreign currency translation and other adjustments | (71 | ) | — | (71 | ) | ||||||
| Allocation in the fourth quarter of 2015 | (416 | ) | 416 | — | |||||||
| Acquisitions | 201 | 4 | 205 | ||||||||
| Foreign currency translation and other adjustments | 4 | (7 | ) | (3 | ) | ||||||
| Balance as of December 31, 2015 | $ | 15,456 | $ | 413 | $ | 15,869 | |||||
| As of December 31, 2011 | ||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
Patents and developed technology | $ | 1,451 | $ | 698 | $ | 753 | ||||||
Customer relationships | 1,288 | 573 | 715 | |||||||||
Trade names and other | 359 | 249 | 110 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 3,098 | $ | 1,520 | $ | 1,578 | ||||||
|
|
|
|
|
| |||||||
Patents and developed technology Customer relationships Trade names and other Total As of December 31, 2012 Gross
Carrying
Amount Accumulated
Amortization Net
Carrying
Value $ 7,310 $ 1,323 $ 5,987 2,061 847 1,214 576 304 272 $ 9,947 $ 2,474 $ 7,473
| As of December 31, 2014 | |||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
| Patents and developed technology | $ | 6,547 | $ | 2,513 | $ | 4,034 | |||||
| Customer relationships | 1,410 | 1,168 | 242 | ||||||||
| Trade names and other | 696 | 365 | 331 | ||||||||
| Total | $ | 8,653 | $ | 4,046 | $ | 4,607 | |||||
| As of December 31, 2015 | |||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | |||||||||
| Patents and developed technology | $ | 6,592 | $ | 3,213 | $ | 3,379 | |||||
| Customer relationships | 1,343 | 1,201 | 142 | ||||||||
| Trade names and other | 795 | 469 | 326 | ||||||||
| Total | $ | 8,730 | $ | 4,883 | $ | 3,847 | |||||
assets were not material for the year ended December 31, 2015.
| Alphabet Inc. and Google Inc. | |
2013 | $ | 1,188 | ||
2014 | 1,115 | |||
2015 | 956 | |||
2016 | 879 | |||
2017 | 821 | |||
Thereafter | 2,514 | |||
|
| |||
| $ | 7,473 | |||
|
|
| 2016 | $ | 806 | |
| 2017 | 724 | ||
| 2018 | 637 | ||
| 2019 | 528 | ||
| 2020 | 434 | ||
| Thereafter | 718 | ||
| $ | 3,847 | ||
In December 2012,
The following table presents financial results of the Motorola Mobile business included in net income (loss) from discontinued operations for the years ended December 31, 2013 and 2014 (in millions):
| Year Ended December 31, | |||||||
| 2013 | 2014 (1) | ||||||
| Revenues | $ | 4,306 | $ | 5,486 | |||
| Loss from discontinued operations before income taxes | (1,403 | ) | (177 | ) | |||
| Benefits from/(Provision for) income taxes | 270 | (47 | ) | ||||
| Gain on disposal | 0 | 740 | |||||
| Net (loss) income from discontinued operations | $ | (1,133 | ) | $ | 516 | ||
(1) | The operating results of Motorola Mobile were included in our Consolidated Statements of Income from January 1, 2014 through October 29, 2014, the date of divestiture. |
| Alphabet Inc. and Google Inc. | |
| Assets: | |||
| Cash and cash equivalents | $ | 160 | |
| Accounts receivable | 1,103 | ||
| Inventories | 217 | ||
| Prepaid expenses and other current assets | 357 | ||
| Prepaid expenses and other assets, non-current | 290 | ||
| Property and equipment, net | 542 | ||
| Intangible assets, net | 985 | ||
| Goodwill | 43 | ||
| Total assets | $ | 3,697 | |
| Liabilities: | |||
| Accounts payable | $ | 1,238 | |
| Accrued compensation and benefits | 163 | ||
| Accrued expenses and other current liabilities | 10 | ||
| Deferred revenue, current | 165 | ||
| Other long-term liabilities | 250 | ||
| Total liabilities | $ | 1,826 | |
Revenues | $ | 2,028 | ||
Loss from discontinued operations before income taxes | (22 | ) | ||
Provision for income taxes | (29 | ) | ||
Net loss from discontinued operations | $ | (51 | ) |
Note 9. Restructuring charges
Subsequent to our acquisition of Motorola in May 2012, we initiated a restructuring plan primarily in our Mobile segment to reduce workforce, reorganize management structure, close, consolidate and dispose certain facilities, as well as simplify our mobile product portfolio. These changes are designed to return Motorola’s Mobile segment to profitability. Fordiscontinued operations for the year ended December 31, 2012, activities related to restructuring charges were summarized as below2013 (in millions):
| Severance and Related | Other Charges | Total | ||||||||||
Balance as of December 31, 2011 | $ | 0 | $ | 0 | $ | 0 | ||||||
Charges(1) | 572 | 59 | 631 | |||||||||
Cash payments | (189 | ) | (8 | ) | (197 | ) | ||||||
Non-cash items(2) | (145 | ) | (36 | ) | (181 | ) | ||||||
|
|
|
|
|
| |||||||
Balance as of December 31, 2012 | $ | 238 | $ | 15 | $ | 253 | ||||||
|
|
|
|
|
| |||||||
(1)The operating results of Motorola Home | |||||||||||||||||||||||||||||||||||||||||
|
For the year ended December 31, 2012, restructuring charges were included in costs and expenses as follows (in millions):
| Year Ended December 31, 2012 | ||||||||||||
| Severance and Related | Other Charges | Total | ||||||||||
Cost of revenues—Motorola Mobile | $ | 88 | $ | 41 | $ | 129 | ||||||
Research and development | 195 | 5 | 200 | |||||||||
Sales and marketing | 123 | 8 | 131 | |||||||||
General and administrative | 114 | 2 | 116 | |||||||||
|
|
|
|
|
| |||||||
Total charges | $ | 520 | $ | 56 | $ | 576 | ||||||
|
|
|
|
|
| |||||||
Restructuring charges related to Home of $55 million were included in net loss from discontinued operations in theour Consolidated Statements of Income.
We continue to evaluate our plansIncome from January 1, 2013 through April 17, 2013, the date of divestiture.
| Alphabet Inc. and Google Inc. | |
liabilities divested (in millions):
| Assets: | |||
| Accounts receivable | $ | 424 | |
| Inventories | 228 | ||
| Deferred income taxes, net | 144 | ||
| Prepaid and other current assets | 152 | ||
| Property and equipment, net | 282 | ||
| Intangible assets, net | 701 | ||
| Other assets, non-current | 182 | ||
| Total assets | $ | 2,113 | |
| Liabilities: | |||
| Accounts payable | $ | 169 | |
| Accrued expenses and other liabilities | 289 | ||
| Total liabilities | $ | 458 | |
| Year Ended December 31, | ||||||||||||
| 2010 | 2011 | 2012 | ||||||||||
Interest income | $ | 579 | $ | 812 | $ | 713 | ||||||
Interest expense | (5 | ) | (58 | ) | (84 | ) | ||||||
Realized gains on available-for-sale investments, net | 185 | 254 | 282 | |||||||||
Impairment of equity investments | 0 | (110 | ) | 0 | ||||||||
Foreign currency exchange losses | (355 | ) | (379 | ) | (531 | ) | ||||||
Gain on divestiture of business | 0 | 0 | 188 | |||||||||
Other | 11 | 65 | 58 | |||||||||
|
|
|
|
|
| |||||||
Interest and other income, net | $ | 415 | $ | 584 | $ | 626 | ||||||
|
|
|
|
|
| |||||||
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| Interest income | $ | 766 | $ | 746 | $ | 999 | |||||
| Interest expense | (81 | ) | (101 | ) | (104 | ) | |||||
| Gain (loss) on marketable securities, net | 158 | 153 | (208 | ) | |||||||
Foreign currency exchange losses, net (1) | (379 | ) | (402 | ) | (422 | ) | |||||
| Gain (loss) on non-marketable investments, net | 8 | 237 | (126 | ) | |||||||
Loss on divestiture of businesses (2) | (57 | ) | 0 | 0 | |||||||
| Other | 81 | 130 | 152 | ||||||||
| Other income (expense), net | $ | 496 | $ | 763 | $ | 291 | |||||
(1) | Our foreign currency exchange losses,net are related to the option premium costs and forward points for our foreign currency hedging contracts, our foreign exchange transaction gains and losses from the conversion of the transaction currency to the functional currency, offset by the foreign currency hedging contract losses and gains. The net foreign currency transaction losses were $121 million, $107 million, and $123 million in 2013, 2014, and 2015, respectively. |
(2) | Gain on divestiture of Motorola Home business was included in net income (loss) from discontinued operations for the year ended December 31, 2013. Gain on divestiture of Motorola Mobile business was included in net income (loss) from discontinued operations for the year ended December 31, 2014. |
At
| Alphabet Inc. and Google Inc. | |
| Operating Leases | Sub-lease Income | Net Operating Leases | ||||||||||
2013 | 492 | 26 | 466 | |||||||||
2014 | 475 | 22 | 453 | |||||||||
2015 | 434 | 17 | 417 | |||||||||
2016 | 374 | 12 | 362 | |||||||||
2017 | 333 | 7 | 326 | |||||||||
Thereafter | 1,596 | 1 | 1,595 | |||||||||
|
|
|
|
|
| |||||||
Total minimum payments | $ | 3,704 | $ | 85 | $ | 3,619 | ||||||
|
|
|
|
|
| |||||||
Operating Leases | Sub-lease Income | Net Operating Leases | |||||||||
| 2016 | 672 | 26 | 646 | ||||||||
| 2017 | 794 | 13 | 781 | ||||||||
| 2018 | 796 | 4 | 792 | ||||||||
| 2019 | 769 | 3 | 766 | ||||||||
| 2020 | 719 | 3 | 716 | ||||||||
| Thereafter | 3,706 | 1 | 3,705 | ||||||||
| Total minimum payments | $ | 7,456 | $ | 50 | $ | 7,406 | |||||
2015.
At
certain inventory purchase commitments.
At
$752 million.
agreements have not had a material adverse effect on our results of operations, cash flows, or financial position. However, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our results of operations or cash flows in a particular period.
Legal Matters
Antitrust Investigations
In June 2011, we received a Civil Investigative Demand (CID) from the U.S. Federal Trade Commission’s (FTC) Bureau of Competition and a subpoena from the FTC’s Bureau of Consumer Protection relating to a review by the FTC of our business practices, including search and advertising. In June 2012, we also received a CID and a subpoena duces tecum from the FTC’s Bureau of Competition seeking documents and information broadly related to Motorola’s licensing practices for standards-essential patents and use of standards-essential patents in litigation. In January 2013, the FTC closed its investigations into our business practices, including search and advertising. In connection with the closing As part of the investigation, we have voluntarily agreed to make certain product changes. In addition, wesale of Motorola Home and Motorola have entered into a consent order withMobile businesses, we issued indemnifications for certain potential liabilities. Please see Note 9 for additional information.
State attorneys general from the states of Texas, Ohio, and Mississippi have issued similar CIDs relating to our business practices. We are cooperating with the state attorneys general and are responding to their information requests on an ongoing basis.
The European Commission’sCommission's (EC) Directorate General for Competition has also opened an investigation into various antitrust-related complaints against us. Since February 2010, we have received a number of notifications fromOn April 15, 2015, the EC about antitrust complaints filed against us. On November 30, 2010,issued a Statement of
| Alphabet Inc. and Google Inc. | |
EC.
EPA Investigation
In February 2009, we learned of a U.S. Environmental Protection Agency (EPA) investigation into an alleged release of refrigerant at one of our smaller data center facilities, whichbusiness practices. In August 2015, we acquired from DoubleClick,received the CCI Director General's report with interim findings of competition law infringements regarding search and ads. In September 2015, FAS found that there has been a competition law infringement in Android mobile distribution. We will respond to the accuracy of related statements and records. We are cooperating with the EPACCI's report and have provided documentsfiled an appeal of the FAS decision. In July 2015, the Taiwan Fair Trade Commission informed us that it was closing its antitrust investigations of our business practices.
2012 in an antitrust investigation of our business practices. We have responded to those subpoenas, and we remain willing to cooperate with them if they have any further information requests.
practices, and require development of non-infringing products or technologies, which could result in a loss of revenues for us and otherwise harm our business. In addition, the U.S. International Trade Commission (ITC) has increasingly become an important forum to litigate intellectual property disputes because an ultimate loss for a company or its suppliers in an ITC action could result in a prohibition on importing infringing products into the U.S. Since the U.S. is an important market, a prohibition on importation could have an adverse effect on us, including preventing us from importing many important products into the U.S. or necessitating workarounds that may limit certain features of our products.
In December 2012, we announced that Motorola Mobility had entered into an agreement with Arris Group, Inc. and certain other persons providing for the disposition of Motorola’s Home business for total consideration of approximately $2.35 billion, subject to certain adjustments. Under the agreement, we have agreed to indemnify Arris Group for potential liability from certain intellectual property infringement litigation, including, among others, a patent infringement claim brought by TiVo relating to certain digital video recording equipment sold by Motorola Mobility.
Income
| Alphabet Inc. and Google Inc. | |
| Alphabet Inc. and Google Inc. | |
| Year Ended December 31, | |||||||||||
| 2013 | |||||||||||
| Class A | Class B | Class C | |||||||||
| Basic net income (loss) per share: | |||||||||||
| Numerator | |||||||||||
| Allocation of undistributed earnings - continuing operations | $ | 5,407 | $ | 1,173 | $ | 6,580 | |||||
| Allocation of undistributed earnings - discontinued operations | (175 | ) | (38 | ) | (214 | ) | |||||
| Total | $ | 5,232 | $ | 1,135 | $ | 6,366 | |||||
| Denominator | |||||||||||
| Number of shares used in per share computation | 273,518 | 59,328 | 332,846 | ||||||||
| Basic net income (loss) per share: | |||||||||||
| Continuing operations | $ | 19.77 | $ | 19.77 | $ | 19.77 | |||||
| Discontinued operations | (0.64 | ) | (0.64 | ) | (0.64 | ) | |||||
| Basic net income per share | $ | 19.13 | $ | 19.13 | $ | 19.13 | |||||
| Diluted net income (loss) per share: | |||||||||||
| Numerator | |||||||||||
| Allocation of undistributed earnings for basic computation - continuing operations | $ | 5,407 | $ | 1,173 | $ | 6,580 | |||||
| Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares | 1,173 | 0 | 0 | ||||||||
| Reallocation of undistributed earnings | 0 | (21 | ) | 0 | |||||||
| Allocation of undistributed earnings - continuing operations | $ | 6,580 | $ | 1,152 | $ | 6,580 | |||||
| Allocation of undistributed earnings for basic computation - discontinued operations | (175 | ) | (38 | ) | (214 | ) | |||||
| Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares | (38 | ) | 0 | 0 | |||||||
| Reallocation of undistributed earnings | (1 | ) | 1 | 1 | |||||||
| Allocation of undistributed earnings - discontinued operations | $ | (214 | ) | $ | (37 | ) | $ | (213 | ) | ||
| Denominator | |||||||||||
| Number of shares used in basic computation | 273,518 | 59,328 | 332,846 | ||||||||
| Weighted-average effect of dilutive securities | |||||||||||
| Add: | |||||||||||
| Conversion of Class B to Class A common shares outstanding | 59,328 | 0 | 0 | ||||||||
| Employee stock options | 2,748 | 4 | 2,748 | ||||||||
| Restricted stock units and other contingently issuable shares | 3,215 | 0 | 3,215 | ||||||||
| Number of shares used in per share computation | 338,809 | 59,332 | 338,809 | ||||||||
| Diluted net income (loss) per share: | |||||||||||
| Continuing operations | $ | 19.42 | $ | 19.42 | $ | 19.42 | |||||
| Discontinued operations | (0.63 | ) | (0.63 | ) | (0.63 | ) | |||||
| Diluted net income per share | $ | 18.79 | $ | 18.79 | $ | 18.79 | |||||
| Alphabet Inc. and Google Inc. | |
| Year Ended December 31, | |||||||||||
| 2014 | |||||||||||
| Class A | Class B | Class C | |||||||||
| Basic net income per share: | |||||||||||
| Numerator | |||||||||||
| Allocation of undistributed earnings - continuing operations | $ | 5,700 | $ | 1,107 | $ | 6,813 | |||||
| Allocation of undistributed earnings - discontinued operations | 216 | 42 | 258 | ||||||||
| Total | $ | 5,916 | $ | 1,149 | $ | 7,071 | |||||
| Denominator | |||||||||||
| Number of shares used in per share computation | 282,877 | 54,928 | 338,130 | ||||||||
| Basic net income per share: | |||||||||||
| Continuing operations | $ | 20.15 | $ | 20.15 | $ | 20.15 | |||||
| Discontinued operations | 0.76 | 0.76 | 0.76 | ||||||||
| Basic net income per share | $ | 20.91 | $ | 20.91 | $ | 20.91 | |||||
| Diluted net income per share: | |||||||||||
| Numerator | |||||||||||
| Allocation of undistributed earnings for basic computation - continuing operations | $ | 5,700 | $ | 1,107 | $ | 6,813 | |||||
| Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares | 1,107 | 0 | 0 | ||||||||
| Reallocation of undistributed earnings | (20 | ) | (18 | ) | 20 | ||||||
| Allocation of undistributed earnings - continuing operations | $ | 6,787 | $ | 1,089 | $ | 6,833 | |||||
| Allocation of undistributed earnings for basic computation - discontinued operations | 216 | 42 | 258 | ||||||||
| Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares | 42 | 0 | 0 | ||||||||
| Reallocation of undistributed earnings | (1 | ) | (1 | ) | 1 | ||||||
| Allocation of undistributed earnings - discontinued operations | $ | 257 | $ | 41 | $ | 259 | |||||
| Denominator | |||||||||||
| Number of shares used in basic computation | 282,877 | 54,928 | 338,130 | ||||||||
| Weighted-average effect of dilutive securities | |||||||||||
| Add: | |||||||||||
| Conversion of Class B to Class A common shares outstanding | 54,928 | 0 | 0 | ||||||||
| Employee stock options | 2,057 | 0 | 2,038 | ||||||||
| Restricted stock units and other contingently issuable shares | 2,515 | 0 | 4,525 | ||||||||
| Number of shares used in per share computation | 342,377 | 54,928 | 344,693 | ||||||||
| Diluted net income per share: | |||||||||||
| Continuing operations | $ | 19.82 | $ | 19.82 | $ | 19.82 | |||||
| Discontinued operations | 0.75 | 0.75 | 0.75 | ||||||||
| Diluted net income per share | $ | 20.57 | $ | 20.57 | $ | 20.57 | |||||
| Alphabet Inc. and Google Inc. | |
| Year Ended December 31, | |||||||||||
| 2015 | |||||||||||
| Class A | Class B | Class C | |||||||||
| Basic net income per share: | |||||||||||
| Numerator | |||||||||||
| Adjustment Payment to Class C capital stockholders - continuing operations | $ | 0 | $ | 0 | $ | 522 | |||||
| Allocation of undistributed earnings - continuing operations | 6,695 | 1,196 | 7,935 | ||||||||
| Allocation of undistributed earnings - discontinued operations | 0 | 0 | 0 | ||||||||
| Total | $ | 6,695 | $ | 1,196 | $ | 8,457 | |||||
| Denominator | |||||||||||
| Number of shares used in per share computation | 289,640 | 51,745 | 343,241 | ||||||||
| Basic net income per share: | |||||||||||
| Continuing operations | $ | 23.11 | $ | 23.11 | $ | 24.63 | |||||
| Discontinued operations | 0.00 | 0.00 | 0.00 | ||||||||
| Basic net income per share | $ | 23.11 | $ | 23.11 | $ | 24.63 | |||||
| Diluted net income per share: | |||||||||||
| Numerator | |||||||||||
| Adjustment Payment to Class C capital stockholders - continuing operations | $ | 0 | $ | 0 | $ | 522 | |||||
| Allocation of undistributed earnings for basic computation - continuing operations | $ | 6,695 | $ | 1,196 | $ | 7,935 | |||||
| Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares | 1,196 | 0 | 0 | ||||||||
| Reallocation of undistributed earnings | (39 | ) | (14 | ) | 39 | ||||||
| Allocation of undistributed earnings - continuing operations | 7,852 | 1,182 | 7,974 | ||||||||
| Allocation of undistributed earnings for basic computation - discontinued operations | 0 | 0 | 0 | ||||||||
| Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares | 0 | 0 | 0 | ||||||||
| Reallocation of undistributed earnings | 0 | 0 | 0 | ||||||||
| Allocation of undistributed earnings - discontinued operations | $ | 0 | $ | 0 | $ | 0 | |||||
| Denominator | |||||||||||
| Number of shares used in basic computation | 289,640 | 51,745 | 343,241 | ||||||||
| Weighted-average effect of dilutive securities | |||||||||||
| Add: | |||||||||||
| Conversion of Class B to Class A common shares outstanding | 51,745 | 0 | 0 | ||||||||
| Employee stock options | 1,475 | 0 | 1,428 | ||||||||
| Restricted stock units and other contingently issuable shares | 920 | 0 | 4,481 | ||||||||
| Number of shares used in per share computation | 343,780 | 51,745 | 349,150 | ||||||||
| Diluted net income per share: | |||||||||||
| Continuing operations | $ | 22.84 | $ | 22.84 | $ | 24.34 | |||||
| Discontinued operations | 0.00 | 0.00 | 0.00 | ||||||||
| Diluted net income per share | $ | 22.84 | $ | 22.84 | $ | 24.34 | |||||
| Alphabet Inc. and Google Inc. | |
and Class C Capital Stock
In April 2012, our board of directors approved amendments to our certificate of incorporation that would, among other things, createPlans
The par value per share of our shares of Class A common stock and Class B common stock will remain unchanged at $0.001 per share after the Dividend. On the effective date of the Dividend, there will be a transfer between retained earnings and common stock and the amount transferred will be equal to the $0.001 par value of the Class C capital stock that is issued. We will give retroactive effect to prior period share and per share amounts in our consolidated financial statementsreserved for the effect of the Dividend, such that prior periods are comparable to current period presentation.
Stock Plans
We maintain the 1998 Stock Plan, the 2000 Stock Plan, the 2003 Stock Plan, the 2003 Stock Plan (No. 2), the 2003 Stock Plan (No. 3),future grants under the 2004 Stock Plan expired and plans assumed through acquisitions, all of which are collectively referred to aswe began granting awards from the “Stock Plans.”2012 Stock Plan (“Stock Plan”). Under our Stock Plans, incentive and non-qualifiedPlan, RSUs or stock options or rights to purchase common stock may be granted to eligible participants. Options are generally granted for a term of 10 years. Under the Stock Plans, we have also issued RSUs.granted. An RSU award is an agreement to issue shares of our publicly traded stock at the time the award vests. ExceptIncentive and non-qualified stock options, or rights to purchase common stock, are generally granted for options granted pursuant to our stock option exchange program completed in March 2009 (the Exchange), options granteda term of 10 years. Options and RSUs issuedgranted to participants under the Stock PlansPlan generally vest over four years contingent upon employment or service with us on the vesting date.
At
We estimated the fair value of each option award on the date of grant using the BSM option pricing model. Our assumptions about stock-price volatility have been based exclusively on the implied volatilities of publicly traded options to buy our stock with contractual terms closest to the expected life of options granted to our employees. We estimate the expected term based upon the historical exercise behavior of our employees. The risk-free interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.
Plan.
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| Cost of revenues | $ | 469 | $ | 535 | $ | 806 | |||||
| Research and development | 1,641 | 2,200 | 2,687 | ||||||||
| Sales and marketing | 552 | 715 | 899 | ||||||||
| General and administrative | 465 | 725 | 861 | ||||||||
| Discontinued operations | 216 | 104 | 0 | ||||||||
| Total stock-based compensation expense | $ | 3,343 | $ | 4,279 | $ | 5,253 | |||||
| Year Ended December 31, | ||||||||||||
| 2010 | 2011 | 2012 | ||||||||||
Risk-free interest rate | 1.9 | % | 2.3 | % | 1.0 | % | ||||||
Expected volatility | 35 | % | 33 | % | 29 | % | ||||||
Expected life (in years) | 5.4 | 5.9 | 5.2 | |||||||||
Dividend yield | 0 | 0 | 0 | |||||||||
Weighted-average estimated fair value of options granted during the year | $ | 216.43 | $ | 210.07 | $ | 194.27 | ||||||
years ended December 31, 2013, 2014, and 2015, $0 million, $0 million, and $50 million, respectively, was associated with awards ultimately settled in cash. Awards which will be ultimately settled in cash are classified as liabilities in our Consolidated Balance Sheets.
| Alphabet Inc. and Google Inc. | |
| Options Outstanding | ||||||||||||||||
| Number of Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in millions)(1) | |||||||||||||
Balance at December 31, 2011 | 9,807,252 | $ | 357.92 | |||||||||||||
Granted(2) | 1,392,191 | $ | 580.45 | |||||||||||||
Exercised | (2,409,331 | ) | $ | 305.81 | ||||||||||||
Forfeited/canceled | (238,717 | ) | $ | 460.45 | ||||||||||||
|
| |||||||||||||||
Balance at December 31, 2012 | 8,551,395 | $ | 405.98 | 5.2 | $ | 2,516 | ||||||||||
|
| |||||||||||||||
Vested and exercisable as of December 31, 2012 | 6,023,559 | $ | 351.44 | 4.1 | $ | 2,099 | ||||||||||
Vested and exercisable as of December 31, 2012 and expected to vest thereafter(3) | 8,218,732 | $ | 400.72 | 5.2 | $ | 2,461 | ||||||||||
| Options Outstanding | ||||||||||||
Number of Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value (in millions)(1) | |||||||||
| Balance as of December 31, 2014 | 7,240,419 | $ | 215.56 | |||||||||
| Granted | 0 | N/A | ||||||||||
| Exercised | (2,072,550 | ) | $ | 189.64 | ||||||||
| Forfeited/canceled | (268,886 | ) | $ | 310.47 | ||||||||
| Balance as of December 31, 2015 | 4,898,983 | $ | 221.31 | 3.7 | $ | 2,682 | ||||||
| Exercisable as of December 31, 2015 | 4,462,847 | $ | 212.02 | 3.4 | $ | 2,484 | ||||||
Exercisable as of December 31, 2015 and expected to vest thereafter (2) | 4,846,996 | $ | 220.29 | 3.6 | $ | 2,658 | ||||||
(1) | The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock |
(2) |
|
Options expected to vest reflect an estimated forfeiture rate. |
The following table summarizes additional information regarding outstanding, exercisable, and exercisable and vested stock options at December 31, 2012:
| Options Outstanding | Options Exercisable | Options Exercisable and Vested | ||||||||||||||||||||||||||
Range of Exercise Prices | Number of Shares | Weighted- Average Remaining Life (in years) | Weighted- Average Exercise Price | Number of Shares | Weighted- Average Exercise Price | Number of Shares | Weighted- Average Exercise Price | |||||||||||||||||||||
$0.30–$94.80 | 116,852 | 1.7 | $ | 37.03 | 116,852 | $ | 37.03 | 113,209 | $ | 35.41 | ||||||||||||||||||
$117.84–$198.41 | 248,831 | 2.0 | $ | 178.65 | 248,831 | $ | 178.65 | 248,831 | $ | 178.65 | ||||||||||||||||||
$205.96–$298.86 | 282,647 | 2.4 | $ | 275.51 | 282,552 | $ | 275.51 | 282,552 | $ | 275.51 | ||||||||||||||||||
$300.97–$399.00 | 3,998,815 | 3.8 | $ | 309.39 | 3,642,248 | $ | 309.57 | 3,642,248 | $ | 309.57 | ||||||||||||||||||
$401.78–$499.07 | 993,591 | 5.9 | $ | 442.95 | 766,098 | $ | 441.55 | 766,098 | $ | 441.55 | ||||||||||||||||||
$501.27–$595.35 | 1,803,839 | 6.9 | $ | 536.31 | 848,574 | $ | 529.82 | 848,574 | $ | 529.82 | ||||||||||||||||||
$601.17–$699.35 | 1,089,126 | 8.9 | $ | 629.41 | 120,757 | $ | 614.76 | 120,757 | $ | 614.76 | ||||||||||||||||||
$710.84–$762.5 | 17,694 | 9.7 | $ | 762.27 | 1,290 | $ | 759.30 | 1,290 | $ | 759.30 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
$0.30–$762.5 | 8,551,395 | 5.2 | $ | 405.98 | 6,027,202 | $ | 351.28 | 6,023,559 | $ | 351.44 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
The above tables include approximately 1.6 million warrants held by selected financial institutions that were options purchased from employees under our TSO program, with a weighted-average exercise price of $363.66 and a weighted-average remaining life of 1.3 years.
During 2012, the number of shares underlying TSOs sold to selected financial institutions under the TSO program was 1,226,983 at a total value of $365 million, or an average of $297.28 per share, including an average premium of $9.35 per share. The premium is calculated as the difference between (a) the sale price of the TSO and (b) the intrinsic value of the TSO, which we define as the excess, if any, of the price of our Class A common stock at the time of the sale over the exercise price of the TSO.
Transferable Stock Options (TSO) program, which was discontinued as of November 29, 2013.
| Unvested Restricted Stock Units | ||||||||
| Number of Shares | Weighted- Average Grant-Date Fair Value | |||||||
Unvested at December 31, 2011 | 8,822,648 | $ | 520.27 | |||||
Granted(1) | 6,704,261 | $ | 603.57 | |||||
Vested | (3,884,811 | ) | $ | 530.15 | ||||
Forfeited/canceled | (647,171 | ) | $ | 543.04 | ||||
|
|
|
| |||||
Unvested at December 31, 2012 | 10,994,927 | $ | 566.32 | |||||
|
|
|
| |||||
Expected to vest after December 31, 2012(2) | 9,547,995 | $ | 566.32 | |||||
| Unvested Restricted Stock Units | ||||||
Number of Shares | Weighted- Average Grant-Date Fair Value | |||||
| Unvested as of December 31, 2014 | 24,619,549 | $ | 487.80 | |||
| Granted | 14,415,740 | $ | 546.46 | |||
| Vested | (11,182,606 | ) | $ | 442.01 | ||
| Forfeited/canceled | (2,111,497 | ) | $ | 481.37 | ||
| Unvested as of December 31, 2015 | 25,741,186 | $ | 531.74 | |||
Expected to vest after December 31, 2015 (1) | 22,672,837 | $ | 531.74 | |||
(1) |
|
RSUs expected to vest reflect an estimated forfeiture rate. |
| Alphabet Inc. and Google Inc. | |
2015.
2015.
| Year Ended December 31, | ||||||||||||
| 2010 | 2011 | 2012 | ||||||||||
Current: | ||||||||||||
Federal | $ | 1,657 | $ | 1,724 | $ | 2,342 | ||||||
State | 458 | 274 | 171 | |||||||||
Foreign | 167 | 248 | 358 | |||||||||
|
|
|
|
|
| |||||||
Total | 2,282 | 2,246 | 2,871 | |||||||||
|
|
|
|
|
| |||||||
Deferred: | ||||||||||||
Federal | (25 | ) | 452 | (328 | ) | |||||||
State | 47 | (109 | ) | (19 | ) | |||||||
Foreign | (13 | ) | (0 | ) | 74 | |||||||
|
|
|
|
|
| |||||||
Total | 9 | 343 | (273 | ) | ||||||||
|
|
|
|
|
| |||||||
Provision for income taxes | $ | 2,291 | $ | 2,589 | $ | 2,598 | ||||||
|
|
|
|
|
| |||||||
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| Current: | |||||||||||
| Federal | $ | 2,394 | $ | 2,716 | $ | 3,235 | |||||
| State | 127 | 157 | (397 | ) | |||||||
| Foreign | 711 | 774 | 723 | ||||||||
| Total | 3,232 | 3,647 | 3,561 | ||||||||
| Deferred: | |||||||||||
| Federal | (421 | ) | 29 | (198 | ) | ||||||
| State | 0 | 6 | (43 | ) | |||||||
| Foreign | (72 | ) | (43 | ) | (17 | ) | |||||
| Total | (493 | ) | (8 | ) | (258 | ) | |||||
| Provision for income taxes | $ | 2,739 | $ | 3,639 | $ | 3,303 | |||||
| Alphabet Inc. and Google Inc. | |
| Year ended December 31, | ||||||||||||
| 2010 | 2011 | 2012 | ||||||||||
Expected provision at federal statutory tax rate (35%) | $ | 3,779 | $ | 4,314 | $ | 4,685 | ||||||
State taxes, net of federal benefit | 322 | 122 | 99 | |||||||||
Stock-based compensation expense | 79 | 105 | 52 | |||||||||
Change in valuation allowance | (34 | ) | 27 | 1,921 | ||||||||
Foreign rate differential | (1,769 | ) | (2,001 | ) | (2,200 | ) | ||||||
Federal research credit | (84 | ) | (140 | ) | 0 | |||||||
Tax exempt interest | (12 | ) | (10 | ) | (7 | ) | ||||||
Non-deductible legal settlement | 0 | 175 | 0 | |||||||||
Basis difference in investment in Home business | 0 | 0 | (1,960 | ) | ||||||||
Other permanent differences | 10 | (3 | ) | 8 | ||||||||
|
|
|
|
|
| |||||||
Provision for income taxes | $ | 2,291 | $ | 2,589 | $ | 2,598 | ||||||
|
|
|
|
|
| |||||||
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| Expected provision at federal statutory tax rate (35%) | $ | 5,567 | $ | 6,041 | $ | 6,878 | |||||
| State taxes, net of federal benefit | 133 | 132 | (291 | ) | |||||||
| Change in valuation allowance | (641 | ) | (164 | ) | (65 | ) | |||||
| Foreign rate differential | (2,482 | ) | (2,109 | ) | (2,624 | ) | |||||
| Federal research credit | (433 | ) | (318 | ) | (407 | ) | |||||
| Basis difference in investment of Arris | 644 | 0 | 0 | ||||||||
| Other adjustments | (49 | ) | 57 | (188 | ) | ||||||
| Provision for income taxes | $ | 2,739 | $ | 3,639 | $ | 3,303 | |||||
Income Taxes
| As of December 31, | ||||||||
| 2011 | 2012 | |||||||
Deferred tax assets: | ||||||||
Stock-based compensation expense | $ | 288 | $ | 311 | ||||
State taxes | 138 | 184 | ||||||
Capital loss carryforward | 285 | 236 | ||||||
Settlement with the Authors Guild and AAP | 35 | 28 | ||||||
Vacation accruals | 52 | 67 | ||||||
Deferred rent | 43 | 50 | ||||||
Accruals and reserves not currently deductible | 268 | 688 | ||||||
Acquired net operating losses | 156 | 505 | ||||||
Tax credit | 55 | 274 | ||||||
Basis difference in investment in Home business | 0 | 2,043 | ||||||
Other | 11 | 128 | ||||||
|
|
|
| |||||
Total deferred tax assets | 1,331 | 4,514 | ||||||
Valuation allowance | (333 | ) | (2,629 | ) | ||||
|
|
|
| |||||
Total deferred tax assets net of valuation allowance | 998 | 1,885 | ||||||
Deferred tax liabilities: | ||||||||
Depreciation and amortization | (479 | ) | (761 | ) | ||||
Identified intangibles | (398 | ) | (1,496 | ) | ||||
Unrealized gains on investments and other | (90 | ) | (105 | ) | ||||
Other prepaids | (70 | ) | (118 | ) | ||||
Other | (33 | ) | (133 | ) | ||||
|
|
|
| |||||
Total deferred tax liabilities | (1,070 | ) | (2,613 | ) | ||||
|
|
|
| |||||
Net deferred tax liabilities | $ | (72 | ) | $ | (728 | ) | ||
|
|
|
| |||||
| Alphabet Inc. and Google Inc. | |
| As of December 31, | |||||||
| 2014 | 2015 | ||||||
| Deferred tax assets: | |||||||
| Stock-based compensation expense | $ | 376 | $ | 534 | |||
| State taxes | 133 | 119 | |||||
| Investment loss | 133 | 144 | |||||
| Legal settlement accruals | 175 | 101 | |||||
| Accrued employee benefits | 671 | 832 | |||||
| Accruals and reserves not currently deductible | 175 | 245 | |||||
| Net operating losses | 207 | 230 | |||||
| Tax credits | 262 | 503 | |||||
| Basis difference in investment of Arris | 1,347 | 1,357 | |||||
| Prepaid cost sharing | 0 | 3,468 | |||||
| Other | 243 | 337 | |||||
| Total deferred tax assets | 3,722 | 7,870 | |||||
| Valuation allowance | (1,659 | ) | (1,732 | ) | |||
| Total deferred tax assets net of valuation allowance | 2,063 | 6,138 | |||||
| Deferred tax liabilities: | |||||||
| Depreciation and amortization | (852 | ) | (1,126 | ) | |||
| Identified intangibles | (965 | ) | (787 | ) | |||
| Mark-to-market investments | (273 | ) | (93 | ) | |||
| Renewable energy investments | (430 | ) | (529 | ) | |||
| Foreign earnings | 0 | (3,468 | ) | ||||
| Other | (125 | ) | (73 | ) | |||
| Total deferred tax liabilities | (2,645 | ) | (6,076 | ) | |||
| Net deferred tax liabilities | $ | (582 | ) | $ | 62 | ||
net operating loss carryforwards for income tax purposes were $263 million that can be carried over indefinitely.
federal and state deferred tax assets for these items in the amount of $205 million. We will reassess the valuation allowance quarterly and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly.
In December 2012, we entered into an agreement with Arris Group Inc. (Arris) for the disposition of the Motorola Home business. A deferred tax asset was established for the book to tax basis difference in our investment in the Motorola Home Business upon signing the agreement. When the disposition event actually occurs in the foreseeable future, some or all of the basis difference in the Home business will become$3.5 billion and a basis difference in Google’s investment in Arris. Since any future losses to be recognized upon sale of the Home business or Arris Shares will be capital losses and Google already has an excess capital loss carryforward, a full valuation allowance was recorded against this deferred tax asset. We will reassessliability of $3.5 billion. Refer to above for more details on the valuation allowance quarterly and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly.
Altera case.
Balance as of January 1, 2010 | $ | 1,188 | ||
Increases related to prior year tax positions | 37 | |||
Decreases related to prior year tax positions | (197 | ) | ||
Decreases related to settlement with tax authorities | (47 | ) | ||
Decreases as a result of a lapse of applicable statute of limitation | (97 | ) | ||
Increases related to current year tax positions | 256 | |||
|
| |||
Balance as of December 31, 2010 | 1,140 | |||
Increases related to prior year tax positions | 77 | |||
Decreases related to prior year tax positions | (9 | ) | ||
Increases related to current year tax positions | 361 | |||
Decreases related to settlement with tax authorities | (5 | ) | ||
|
| |||
Balance as of December 31, 2011 | 1,564 | |||
Increases related to prior year tax positions | 43 | |||
Decreases related to prior year tax positions | (40 | ) | ||
Decreases related to settlement with tax authorities | (62 | ) | ||
Increases related to acquisition | 17 | |||
Increases related to current year tax positions | 411 | |||
|
| |||
Balance as of December 31, 2012 | 1,933 | |||
|
|
Our
| Alphabet Inc. and Google Inc. | |
| Balance as of January 1, 2013 | $ | 1,907 | |
| Increases related to prior year tax positions | 158 | ||
| Decreases related to prior year tax positions | (37 | ) | |
| Decreases related to settlement with tax authorities | (78 | ) | |
| Increases related to current year tax positions | 552 | ||
| Balance as of December 31, 2013 | 2,502 | ||
| Increases related to prior year tax positions | 66 | ||
| Decreases related to prior year tax positions | (44 | ) | |
| Decreases related to settlement with tax authorities | (1 | ) | |
| Increases related to current year tax positions | 771 | ||
| Balance as of December 31, 2014 | 3,294 | ||
| Increases related to prior year tax positions | 224 | ||
| Decreases related to prior year tax positions | (176 | ) | |
| Decreases related to settlement with tax authorities | (27 | ) | |
| Increases related to current year tax positions | 852 | ||
| Balance as of December 31, 2015 | $ | 4,167 | |
rate.
We and our subsidiaries are routinely examined by various taxing authorities. Although we file U.S. federal U.S.jurisdiction and in many state and foreign tax returns,jurisdictions, our two major tax jurisdictions are the U.S. federal and Ireland. DuringWe are subject to the three months ended December 31, 2007,continuous examination of our income tax returns by the IRS and other tax authorities. The IRS completed its examination of our 2003 and 2004through 2006 tax years. Weyears; all issues have been settled except for one which we have filed an appeal with the IRS for certain issues related to this audit and settlements were reached in 2012 on all but one issue which we plan to litigate in court. As a result we released the related reserves in the three month ended December 31, 2012. The IRS is currently in examination of our 2007 2008, and 2009through 2012 tax years. We expect the examinationhave also received tax assessments in multiple foreign jurisdictions asserting transfer pricing adjustments or permanent establishment. We continue to be completed within the next 12 months, but we do not anticipatedefend any significant impact to our unrecognized tax benefit balanceand all such claims as of December 31, 2012, related to our 2007, 2008,presented.
Our 2010, 2011 and 20122015 tax years remain subject to examination by the IRS for U.S. federal tax purposes, and our 20062011 through 20122015 tax years remain subject to examination by the appropriate governmental agencies for Irish tax purposes. There are various other ongoing audits in various other jurisdictions that are not material to our financial statements.
Prior to
Google—Our reported segments are described below:
| Alphabet Inc. and Google Inc. | |
Mobile—includesRevenue, cost of revenue, and operating expenses are generally directly attributed to our mobile devices business acquired from Motorola
Home—includes our digital set-top box business acquired from Motorola
In December 2012,segments. Inter-segment revenues are not presented separately, as a result of an agreement for the disposition of the Home segment, the Home segment is presented as discontinued operations and therefore is not included in the segment report.
these amounts are immaterial. Our chief operating decision makers doCODM does not evaluate operating segments using asset information.
The following table sets forth revenues and operating income (loss) by operating segment (in millions):
| Year Ended December 31, | ||||||||||||
| 2010 | 2011 | 2012 | ||||||||||
Google: | ||||||||||||
Revenues | $ | 29,321 | $ | 37,905 | $ | 46,039 | ||||||
Income from operations | 11,757 | 14,216 | 16,308 | |||||||||
Mobile: | ||||||||||||
Revenues | 0 | 0 | 4,136 | |||||||||
Loss from operations | 0 | 0 | (393 | ) | ||||||||
A reconciliation of
| Year Ended December 31, | ||||||||||||
| 2010 | 2011 | 2012 | ||||||||||
Total segment income from operations | $ | 11,757 | $ | 14,216 | $ | 15,915 | ||||||
Unallocated items | (1,376 | ) | (2,474 | ) | (3,155 | ) | ||||||
|
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| |||||||
Consolidated income from operations | $ | 10,381 | $ | 11,742 | $ | 12,760 | ||||||
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| |||||||
Unallocated items, including stock-based
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| Revenues: | |||||||||||
| $ | 55,507 | $ | 65,674 | $ | 74,541 | ||||||
| Other Bets | 12 | 327 | 448 | ||||||||
| Total revenues | $ | 55,519 | $ | 66,001 | $ | 74,989 | |||||
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| Segment operating income (loss): | |||||||||||
| $ | 16,260 | $ | 19,011 | $ | 23,425 | ||||||
| Other Bets | (527 | ) | (1,942 | ) | (3,567 | ) | |||||
Reconciling items(1) | (330 | ) | (573 | ) | (498 | ) | |||||
| Total income from operations | $ | 15,403 | $ | 16,496 | $ | 19,360 | |||||
(1) | Reconciling items are primarily related to corporate administrative costs and other miscellaneous items that are not allocated to individual segments. |
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| Capital expenditures: | |||||||||||
| $ | 7,006 | $ | 11,173 | $ | 8,849 | ||||||
| Other Bets | 187 | 501 | 869 | ||||||||
Reconciling items(2) | 165 | (715 | ) | 197 | |||||||
| Total capital expenditures as presented in Consolidated Statements of Cash Flow | $ | 7,358 | $ | 10,959 | $ | 9,915 | |||||
(2) | Reconciling items are primarily related to timing differences of payments as segment capital expenditures are on accrual basis while total capital expenditures shown on the Consolidated Statements of Cash Flow are on cash basis, capital expenditures of Motorola Mobile and Home, and other miscellaneous differences. |
| Alphabet Inc. and Google Inc. | |
income (loss) as below (in millions):
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| Stock-based compensation: | |||||||||||
| $ | 2,911 | $ | 3,677 | $ | 4,587 | ||||||
| Other Bets | 124 | 347 | 498 | ||||||||
Reconciling items(3) | 92 | 151 | 118 | ||||||||
Total stock based compensation, excluding discontinued operations(4) | $ | 3,127 | $ | 4,175 | $ | 5,203 | |||||
| Depreciation, amortization and impairment: | |||||||||||
| $ | 3,668 | $ | 4,778 | $ | 4,839 | ||||||
| Other Bets | 24 | 148 | 203 | ||||||||
Reconciling items(5) | 247 | 53 | 21 | ||||||||
| Total depreciation, amortization and impairment as presented in Consolidated Statements of Cash Flow | $ | 3,939 | $ | 4,979 | $ | 5,063 | |||||
(3) | Reconciling items represent corporate administrative costs that are not allocated to individual segments. |
(4) | For purposes of segment reporting, we define SBC as awards accounted for under FASB ASC Topic 718 that we expect to settle in stock. SBC does not include expenses related to awards that we will ultimately settle in cash. Amounts exclude SBC from discontinued operations. |
(5) | Reconciling items primarily represent depreciation, amortization and impairment related to Motorola Mobile and Motorola Home. |
| Year Ended December 31, | ||||||||||||
| 2010 | 2011 | 2012 | ||||||||||
Revenues: | ||||||||||||
United States | $ | 14,056 | $ | 17,560 | $ | 23,502 | ||||||
United Kingdom | 3,329 | 4,057 | 4,872 | |||||||||
Rest of the world | 11,936 | 16,288 | 21,801 | |||||||||
|
|
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| |||||||
Total revenues | $ | 29,321 | $ | 37,905 | $ | 50,175 | ||||||
|
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| |||||||
| As of December 31, | ||||||||
| 2011 | 2012 | |||||||
Long-lived assets(1) : | ||||||||
United States | $ | 15,963 | $ | 20,985 | ||||
International | 3,853 | 12,359 | ||||||
|
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| |||||
Total long-lived assets | $ | 19,816 | $ | 33,344 | ||||
|
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| |||||
| Year Ended December 31, | |||||||||||
| 2013 | 2014 | 2015 | |||||||||
| Revenues: | |||||||||||
| United States | $ | 25,587 | $ | 29,482 | $ | 34,810 | |||||
| United Kingdom | 5,600 | 6,483 | 7,067 | ||||||||
| Rest of the world | 24,332 | 30,036 | 33,112 | ||||||||
| Total revenues | $ | 55,519 | $ | 66,001 | $ | 74,989 | |||||
| As of December 31, 2014 | As of December 31, 2015 | ||||||
| Long-lived assets: | |||||||
| United States | $ | 37,421 | $ | 43,686 | |||
| International | 13,110 | 13,661 | |||||
| Total long-lived assets | $ | 50,531 | $ | 57,347 | |||
| |
| Alphabet Inc. and Google Inc. | |
| As of December 31, 2014 | |||||||||||
As Previously Reported (1) | Adjustment | As Revised | |||||||||
| Selected Balance Sheets Data: | |||||||||||
| Income tax receivable, net | $ | 1,298 | $ | (707 | ) | $ | 591 | ||||
| Total current assets | 79,363 | (707 | ) | 78,656 | |||||||
| Total assets | 129,894 | (707 | ) | 129,187 | |||||||
| Income taxes payable, non-current | 3,407 | (67 | ) | 3,340 | |||||||
| Retained earnings | 75,706 | (640 | ) | 75,066 | |||||||
| Total stockholders' equity | 104,500 | (640 | ) | 103,860 | |||||||
| Total liabilities and stockholders' equity | $ | 129,894 | $ | (707 | ) | $ | 129,187 | ||||
| Year Ended December 31, 2013 | Year Ended December 31, 2014 | ||||||||||||||||||||||
| As Previously Reported | Adjustment | As Revised | As Previously Reported | Adjustment | As Revised | ||||||||||||||||||
| Selected Statements of Income Data: | |||||||||||||||||||||||
| Provision for income taxes | $ | 2,552 | $ | 187 | $ | 2,739 | $ | 3,331 | $ | 308 | $ | 3,639 | |||||||||||
| Net income from continuing operations | 13,347 | (187 | ) | $ | 13,160 | 13,928 | (308 | ) | $ | 13,620 | |||||||||||||
| Net income | 12,920 | (187 | ) | $ | 12,733 | 14,444 | (308 | ) | $ | 14,136 | |||||||||||||
| Basic net income per share from continuing operations | $ | 20.05 | $ | (0.28 | ) | $ | 19.77 | $ | 20.61 | $ | (0.46 | ) | $ | 20.15 | |||||||||
| Basic net income per share | 19.41 | (0.28 | ) | 19.13 | 21.37 | (0.46 | ) | 20.91 | |||||||||||||||
| Diluted net income per share from continuing operations | 19.70 | (0.28 | ) | 19.42 | 20.27 | (0.45 | ) | 19.82 | |||||||||||||||
| Diluted net income per share | $ | 19.07 | $ | (0.28 | ) | $ | 18.79 | $ | 21.02 | $ | (0.45 | ) | $ | 20.57 | |||||||||
| Year Ended December 31, 2013 | Year Ended December 31, 2014 | ||||||||||||||||
| As Previously Reported | Adjustment | As Revised | As Previously Reported | Adjustment | As Revised | ||||||||||||
| Selected Statements of Comprehensive Income Data: | |||||||||||||||||
| Net income | 12,920 | (187 | ) | 12,733 | 14,444 | (308 | ) | 14,136 | |||||||||
| Comprehensive income | 12,507 | (187 | ) | 12,320 | 14,346 | (308 | ) | 14,038 | |||||||||
| Alphabet Inc. and Google Inc. | |
| Year Ended December 31, 2013 | Year Ended December 31, 2014 | |||||||||||||||||||||
| As Previously Reported | Adjustment | As Revised | As Previously Reported | Adjustment | As Revised | |||||||||||||||||
| Selected Statements of Cash Flows Data: | ||||||||||||||||||||||
| Net income | $ | 12,920 | $ | (187 | ) | 12,733 | $ | 14,444 | $ | (308 | ) | $ | 14,136 | |||||||||
| Changes in income taxes, net | 401 | 187 | 588 | 283 | 308 | 591 | ||||||||||||||||
| Alphabet Inc. and Google Inc. | |
| Alphabet Inc. and Google Inc. | |
| ◦ | $3.5 million equity grant (Initial Grant) made shortly after hire vesting monthly over 12 months |
| ◦ | $3.5 million equity grant to be made in Q1 2017, to start vesting monthly over 12 months upon the full vest of the Initial Grant |
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
| Alphabet Inc. and Google Inc. | |
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
| ||||
Allowance for Doubtful Accounts and Sales Credits | Balance at Beginning of Year | Additions | Usage | Balance at End of Year | ||||||||||||
| (In millions) | ||||||||||||||||
Year ended December 31, 2010 | $ | 79 | $ | 200 | $ | (178 | ) | $ | 101 | |||||||
Year ended December 31, 2011 | $ | 101 | $ | 214 | $ | (182 | ) | $ | 133 | |||||||
Year ended December 31, 2012 | $ | 133 | $ | 1,263 | $ | (815 | ) | $ | 581 | |||||||
Balance at Beginning of Year | Additions | Usage | Balance at End of Year | ||||||||||||
| (In millions) | |||||||||||||||
| Year ended December 31, 2013 | $ | 581 | $ | 1,128 | $ | (1,078 | ) | $ | 631 | ||||||
| Year ended December 31, 2014 | $ | 631 | $ | 1,240 | $ | (1,646 | ) | $ | 225 | ||||||
| Year ended December 31, 2015 | $ | 225 | $ | 579 | $ | (508 | ) | $ | 296 | ||||||
| Note: | Additions to the allowance for doubtful accounts are charged to expense. Additions to the allowance for sales credits are charged against revenues. For |
| Alphabet Inc. and Google Inc. | |
|
| ||
| By: | /S/ LARRY PAGE | ||
| Larry Page | |||
Chief Executive Officer (Principal Executive Officer of Alphabet Inc.) | |||
| Alphabet Inc. and Google Inc. | ||
|
| |||
Signature | Title | Date | ||
/S/ LARRY PAGE
| Chief Executive Officer, Co-Founder and Director (Principal Executive | February 11, 2016 | ||
| Larry Page | ||||
/S/ RUTH PORAT | ||||
| Senior Vice President and Chief Financial Officer (Principal Financial and Accounting | February 11, 2016 | ||
| Ruth Porat | ||||
/S/ ERIC E. SCHMIDT | Executive Chairman | February 11, 2016 | ||
| Eric E. Schmidt | ||||
/S/ SERGEY BRIN | President, Co-Founder and Director | February 11, 2016 | ||
| Sergey Brin | ||||
/S/ L. JOHN DOERR | Director | February 11, 2016 | ||
| L. John Doerr | ||||
/S/ DIANE B. GREENE | Director | February 11, 2016 | ||
| Diane B. Greene | ||||
/S/ JOHN L. HENNESSY | Director | February 11, 2016 | ||
| John L. Hennessy | ||||
/S/ ANN MATHER | Director | February 11, 2016 | ||
| Ann Mather | ||||
/S/ ALAN R. MULALLY | Director | February 11, 2016 | ||
| Alan R. Mulally | ||||
/S/ PAUL S. OTELLINI | Director | February 11, 2016 | ||
| Paul S. Otellini | ||||
/S/ K. RAM SHRIRAM | Director | February 11, 2016 | ||
| K. Ram Shriram | ||||
/S/ SHIRLEY M. TILGHMAN | Director | February 11, 2016 | ||
| Shirley M. Tilghman | ||||
| Alphabet Inc. and Google Inc. | |
| GOOGLE INC. | |
| By: | /S/ SUNDAR PICHAI |
| Sundar Pichai | |
Chief Executive Officer (Principal Executive Officer of Google Inc.) | |
| Alphabet Inc. and Google Inc. | |
Signature | Title | Date |
/S/ SUNDAR PICHAI | Chief Executive Officer (Principal Executive Officer of Google Inc.) | February 11, 2016 |
| Sundar Pichai | ||
/S/ RUTH PORAT | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer of Google Inc.) | February 11, 2016 |
| Ruth Porat | ||
/S/ ERIC E. SCHMIDT | Executive Chairman | February 11, 2016 |
| Eric E. Schmidt |
| |
/S/ LARRY PAGE | Co-Founder and Director | February 11, 2016 |
| Larry Page | ||
/S/ SERGEY BRIN | Co-Founder and Director | February 11, 2016 |
| Sergey Brin | ||
/S/ L. JOHN DOERR | Director | February 11, 2016 |
| L. John Doerr | ||
/S/ DIANE B. GREENE | Director | February 11, 2016 |
| Diane B. Greene | ||
/S/ JOHN L. HENNESSY | Director | February 11, 2016 |
| John L. Hennessy | ||
/S/ ANN MATHER | Director | February 11, 2016 |
| Ann Mather | ||
/S/ ALAN R. MULALLY | Director | February 11, 2016 |
| Alan R. Mulally | ||
/S/ PAUL S. OTELLINI | Director | February 11, 2016 |
| Paul S. Otellini | ||
/S/ K. RAM SHRIRAM | Director | February 11, 2016 |
| K. Ram Shriram | ||
/S/ SHIRLEY M. TILGHMAN | Director | February 11, 2016 |
| Shirley M. Tilghman | ||
| Alphabet Inc. and Google Inc. | |
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EXHIBIT INDEX
Exhibit Number | Description |
| Incorporated by reference herein | |||||||||
Form | Date | |||||||||||
Current Report on Form 8-K
| October 2, 2015 | |||||||||||
| Amended and Restated Certificate of Incorporation of Alphabet Inc., dated October 2, 2015 | Current Report on Form 8-K (File No. | October 2, 2015 | ||||||||||
| 3.02 | Amended and Restated Bylaws of Alphabet Inc., dated October 2, 2015 | Current Report on Form 8-K (File No. 001-37580) | October 2, 2015 | |||||||||
| 3.03 | Fourth Amended and Restated Certificate of Incorporation of Google Inc. | Quarterly Report on Form 10-Q (File No. 000-50726) | July 24, 2012 | |||||||||
| ||||||||||||
| ||||||||||||
| Quarterly Report on Form 10-Q (File No. 000-50726) | July 24, 2012 | |||||||||||
| Certificate of Merger, dated October 2, 2015 | Current Report on Form 8-K
| |||||||||||
| October 2, 2015 | ||||||||||||
| 4.01 | Specimen Class A Common Stock certificate | |||||||||||
|
|
| ||||||||
| ||||||||||
| October 2, 2015 | ||||||||||
| 4.02 | Current Report on Form 8-K (File No. | |||||||||
| October 2, 2015 | ||||||||||
| 4.03 | Indenture, dated as of May 19, 2011 between Google Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee | Current Report on Form 8-K (File No. 000-50726) | May 19, 2011 | |||||||
| 4.04 | Form of 2.125% Note due 2016 | Current Report on Form 8-K (File No. 000-50726) | May 19, 2011 | |||||||
| 4.05 | Form of 3.625% Note due 2021 | Current Report on Form 8-K (File No. 000-50726) | May 19, 2011 | |||||||
| 4.06 | Form of |
| ||||||||
| ||||||||||
| Current Report on Form 8-K (File No. 000-50726) | February 25, 2014 | |||||||||
| 4.07 | Alphabet Inc. Deferred Compensation Plan | Current Report on Form 8-K (File No. 001-37580) | October 2, 2015 | |||||||
| 4.08 | Terms of Revised Stipulation of Compromise and Settlement of In Re: Google Inc. Class C Shareholder Litigation (Consol. C.A. No. 7469-CS) | Registration Statement on Form 8-A (File No. 001-36380) | March | 26, 2014 | ||||||
| October 2, 2015 | ||||||||||
| 4.10 | Transfer Restriction Agreement, dated | Current Report on Form 8-K (File No. 001-37580) | October 2, 2015 | |||||||
| 4.11 | Transfer Restriction Agreement, dated October 2, 2015, between Alphabet Inc. and Eric E. Schmidt and certain of its affiliates | Current Report on Form 8-K (File No. 001-37580) | October 2, 2015 | |||||||
| 4.12 | Class C Undertaking, dated October 2, 2015, executed by Alphabet Inc. | Current Report on Form 8-K (File No. 001-37580) | October 2, 2015 | |||||||
| 10.01 | Form of Indemnification Agreement entered into between Alphabet Inc., its affiliates and its directors and officers | Current Report on Form 8-K (File No. 001-37580) | October 2, 2015 | |||||||
| 10.02 | u | Offer Letter, dated March 20, 2015, between Ruth Porat and Google Inc. | Current Report on Form 8-K (File No. | March 26, 2015 | ||||||
| Alphabet Inc. and Google Inc. | |
Exhibit Number | ||||||||||
| Form | Date | |||||||||
| 10.03 | u | Compensation Plan Agreement, dated | Current Report on Form 8-K (File No. | October 2, 2015 | ||||||
| 10.04 | u | |||||||||
| Current Report on Form 8-K (File No. | ||||||||||
| Current Report on Form 8-K (File No. | October 2, 2015 | |||||||||
| 10.05 | u | |||||||||
| Quarterly Report on Form 10-Q (File No. | ||||||||||
| October 29, 2015 | ||||||||||
| u |
|
| |||||||
| ||||||||||
| Google Inc. 2004 Stock Plan, as amended | Current Report on Form 8-K (File No. 000-50726) | June 7, 2011 | ||||||||
| 10.06.1 | u | |||||||||
| Google Inc. 2004 Stock | Annual Report on Form 10-K (File No. 000-50726) | March 30, 2005 | ||||||||
| 10.06.2 | u | |||||||||
| Google Inc. 2004 Stock | Annual Report on Form 10-K (File No. 000-50726) | March 30, 2005 | ||||||||
| 10.06.3 | u | |||||||||
| Google Inc. 2004 Stock | Registration Statement on Form S-3 (File No. 333-142243) | April 20, 2007 | ||||||||
| 10.07 | u | |||||||||
Current Report on Form 8-K (File No. 333-00050726) | June 26, 2012 | |||||||||
| 10.07.1 | u* | |||||||||
| ||||||||||
| 10.08 | ||||||||||
| u | Motorola Mobility Holdings, Inc. 2011 Incentive Compensation Plan | Registration Statement on Form S-8 (File No. 333-181661) | May 24, 2012 | |||||||
| 10.09 | ||||||||||
| u | AdMob, Inc. 2006 Stock Plan and UK Sub-Plan of the AdMob, Inc. 2006 Stock Plan | Registration Statement on Form S-8 filed (File No. 333-167411) | June 9, 2010 | |||||||
| 10.10 | ||||||||||
| u | Click Holding Corp. 2005 Stock Incentive Plan | Registration Statement on Form S-8 (File No. 333-149956) | March 28, 2008 | |||||||
|
|
| ||||||||
| ||||||||||
| 12 | * | Computation of Earnings to Fixed Charge Ratios | ||||||||
| 14.01 | Code of Conduct of Alphabet Inc. dated October 2, 2015 | Current Report on Form 8-K (File No. 001-37580) | October 2, 2015 | |||||||
| 21.01 | * | Subsidiaries of the | ||||||||
| 23.01 | * | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | ||||||||
| 24.01 | * | Power of Attorney (incorporated by reference to the signature page of this Annual Report on Form 10-K) | ||||||||
| 31.01 | * | Certification of Chief Executive Officer of Alphabet Inc. pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
| 31.02 | * | Certification of Chief Financial Officer of Alphabet Inc. pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
| Alphabet Inc. and Google Inc. | |
Exhibit Number | Description | Incorporated by reference herein | ||||||||
| Form | Date | |||||||||
| 31.03 | * | Certification of Chief Executive Officer of Google Inc. pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
| 31.04 | * | Certification of Chief Financial Officer of Google Inc. pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||||||
| 32.01 | ‡ | Certifications of Chief Executive Officer and Chief Financial Officer of Alphabet Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||||
| 32.02 | ‡ | Certifications of Chief Executive Officer and Chief Financial Officer of Google Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||||||||
| 101.INS | XBRL Instance Document | |||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | |||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||
| Indicates management compensatory plan, contract, or arrangement. |
| * | Filed herewith. |
| ‡ | Furnished herewith. |