ALPHABET INC. Please read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q. The Impact of COVID-19 on our Results and Operations We began to observe the impact of COVID-19 on our financial results inMarch 2020 when, despite an increase in users' search activity, our advertising revenues declined compared to the prior year due to a shift of user search activity to less commercial topics and reduced spending by our advertisers. For the quarter endedJune 30, 2020 , our advertising revenues declined due to the continued impacts of COVID-19 and the related reductions in global economic activity. During the course of the quarter endedJune 30, 2020 , we observed a gradual return in user search activity to more commercial topics, followed by increased spending by our advertisers that continued throughout the second half of 2020. Additionally, over the course of 2020, we experienced variability in our margins as many of our expenses are less variable in nature and/or may not correlate to changes in revenues. Market volatility contributed to fluctuations in the valuation of our equity investments. Further, our assessment of the credit deterioration of our customers due to changes in the macroeconomic environment during the period was reflected in our allowance for credit losses for accounts receivable. Through the third quarter of 2021, we continued to benefit from elevated consumer activity online and broad-based increases in advertiser spending. We remained focused on innovating and investing in the services we offer to consumers and businesses to support our long-term growth. For example, we continued to invest in our technical infrastructure and data centers. Additionally, our margins benefited from revenue growth while many of our expenses remained less variable in nature and/or may not correlate to changes in revenues. These factors, combined with the impact of COVID-19 in the prior year, affected year-over-year growth trends. Further, year-over-year trends benefited from a reduction in depreciation expense due to the change in the estimated useful life of our servers and certain network equipment beginning in the first quarter of 2021; we expect the effect of this change in estimate to decline through the remainder of the year (for further details see Note 1 of the Notes to Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q). The COVID-19 pandemic continues to evolve, be unpredictable and affect our business and financial results. Our past results may not be indicative of our future performance, and historical trends in our financial results may differ materially. See Part II Item 7, "Impact of COVID-19" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for more information. Executive Overview The following table summarizes our consolidated financial results (in millions, except for per share information and percentages). Three Months Ended September 30, 2020 2021 Revenues$ 46,173 $ 65,118 Change in revenues year over year 14 % 41 % Change in constant currency revenues year over year 15 % 39 % Operating income$ 11,213 $ 21,031 Operating margin 24 % 32 % Other income (expense), net$ 2,146 $ 2,033 Net Income$ 11,247 $ 18,936 Diluted EPS$ 16.40 $ 27.99 •Total revenues were$65.1 billion , an increase of 41% year over year, primarily driven by an increase in$17.3 billion or 41% and an increase in$1.5 billion or 45%. The adverse effect of COVID-19 on the prior year comparable period's 33
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advertising revenues contributed to the year-over-year increase. Revenues fromthe United States , EMEA, APAC, and Other Americas were$29.8 billion ,$19.8 billion ,$11.7 billion , and$3.7 billion , respectively. •Total cost of revenues was$27.6 billion , an increase of 31% year over year. TAC was$11.5 billion , an increase of 41% year over year, primarily driven by an increase in revenues subject to TAC. Other cost of revenues were$16.1 billion , an increase of 24% year over year, affected by a reduction in depreciation expense due to the change in the estimated useful life of our servers and certain network equipment. •Operating expenses (excluding cost of revenues) were$16.5 billion , an increase of 19% year over year, primarily driven by headcount growth and increases in advertising and promotional expenses. Other information •Operating cash flow was$25.5 billion for the three months endedSeptember 30, 2021 . •Capital expenditures, which primarily included investments in technical infrastructure, were$6.8 billion for the three months endedSeptember 30, 2021 . •Number of employees was 150,028 as ofSeptember 30, 2021 . Our Segments Beginning in the fourth quarter of 2020, we report our segment results as$ 26,338 $ 37,926 $ 72,159 $ 105,650 YouTube ads 5,037 7,205 12,887 20,212 Google Network 5,720 7,999 15,679 22,396 Google advertising 37,095 53,130 100,725 148,258 Google other 5,478 6,754 15,037 19,871 Google Services total 42,573 59,884 115,762 168,129 Google Cloud 3,444 4,990 9,228 13,665 Other Bets 178 182 461 572 Hedging gains (losses) (22) 62 178 (54) Total revenues$ 46,173 $ 65,118 $ 125,629 $ 182,312 34
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$11.6 billion and$33.5 billion from the three and nine months endedSeptember 30, 2020 to the three and nine months endedSeptember 30, 2021 , respectively. The overall growth was primarily driven by interrelated factors including increases in search queries resulting from growth in user adoption and usage, primarily on mobile devices, growth in advertiser spending, and improvements we have made in ad formats and delivery. The adverse effect of COVID-19 on prior year comparable period revenues also contributed to the year-over-year increase. YouTube ads YouTube ads revenues increased$2.2 billion and$7.3 billion from the three and nine months endedSeptember 30, 2020 to the three and nine months endedSeptember 30, 2021 , respectively. Growth was driven by our direct response and brand advertising products. Growth for our direct response advertising products was primarily driven by increased advertiser spending as well as improvements to ad formats and delivery. Growth for our brand advertising products for the three months endedSeptember 30, 2021 was primarily driven by increased spending by our advertisers. For the nine months endedSeptember 30, 2021 , the adverse effect of COVID-19 on prior year comparable period brand advertising revenues also contributed to the year-over-year increase.$2.3 billion from the three months endedSeptember 30, 2020 to the three months endedSeptember 30, 2021 . The increase was primarily driven by strength in AdMob, AdSense and$6.7 billion from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 . The increase was primarily driven by strength in AdMob,
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and AdSense. The adverse effect of COVID-19 on prior year comparable period revenues also contributed to the year-over-year increase. Use of Monetization Metrics Paid clicks for our Google Search & other properties represent engagement by users and include clicks on advertisements by end-users on Google search properties and other owned and operated properties including Gmail, Google Maps, and Google Play. Historically, we included certain viewed YouTube engagement ads and the related revenues in our paid clicks and cost-per-click monetization metrics. Over time, advertising on YouTube has expanded to multiple advertising formats and the type of viewed engagement ads historically included in paid clicks and cost-per-click metrics have increasingly covered a smaller portion of YouTube advertising revenues. As a result, beginning in the fourth quarter of 2020, we removed these ads and the related revenues from the paid clicks and cost-per-click metrics. The revised metrics presented below provide a better understanding of monetization trends on the properties included within Google Search & other, as they now more closely correlate with the related changes in revenues. Impressions forSeptember 30, 2020 to the three and nine months endedSeptember 30, 2021 , primarily driven by a number of interrelated factors, including an increase in search queries resulting from growth in user adoption and usage, primarily on mobile devices; an increase in clicks relating to ads onSeptember 30, 2021 the adverse effect of COVID-19 on the prior year comparable period also contributed to the increase in paid clicks. The increase in cost-per-click from the three and nine months endedSeptember 30, 2020 to the three and nine months endedSeptember 30, 2021 was driven by a combination of factors including changes in device mix, geographic mix, changes in advertiser spending, ongoing product changes, product mix, property mix, and fluctuations of theU.S. dollar compared to certain foreign currencies, as well as the adverse effect of COVID-19 on the prior year comparable period. Impressions and cost-per-impression The following table presents changes in our impressions and cost-per-impression (expressed as a percentage): Three Months Ended Nine Months Ended September 30, September 30, 2021 2021 Impressions change 2% 3 % Cost-per-impression change 39% 39% 36
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Impressions increased from the three and nine months endedSeptember 30, 2020 to the three and nine months endedSeptember 30, 2021 , primarily driven by growth in AdMob, partially offset by a decline in impressions related to AdSense. The increase in cost-per-impression from the three and nine months endedSeptember 30, 2020 to the three and nine months endedSeptember 30, 2021 was primarily driven by the adverse effect of COVID-19 on the prior year comparable period as well as the effect of a combination of factors including ongoing product and policy changes and improvements we have made in ad formats and delivery, changes in device mix, geographic mix, product mix, property mix, and fluctuations of theU.S. dollar compared to certain foreign currencies.Nest home products, Pixelbooks, Pixel phones and other devices; •YouTube non-advertising, including YouTube Premium and YouTube TV subscriptions and other services; and •other products and services.$1.3 billion from the three months endedSeptember 30, 2020 to the three months endedSeptember 30, 2021 . The growth was primarily driven by YouTube non-advertising, largely due to an increase in paid subscribers, as well as Devices and Services, reflecting the inclusion of Fitbit revenues as the acquisition closed inJanuary 2021 .$4.8 billion from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 . The growth was primarily driven by YouTube non-advertising and Devices and Services, followed by$1.5 billion and$4.4 billion from the three and nine months endedSeptember 30, 2020 to the three and nine months endedSeptember 30, 2021 , respectively. The growth was primarily driven by GCP followed by
For further details on revenues by geography, see Note 2 of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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Use of Constant Currency Revenues and Constant Currency Revenue Percentage Change The effect of currency exchange rates on our business is an important factor in understanding period to period comparisons. Our international revenues are favorably affected as theU.S. dollar weakens relative to other foreign currencies, and unfavorably affected as theU.S. dollar strengthens relative to other foreign currencies. Our revenues are also favorably affected by net hedging gains and unfavorably affected by net hedging losses. We use non-GAAP constant currency revenues and non-GAAP percentage change in constant currency revenues for financial and operational decision-making and as a means to evaluate period-to-period comparisons. We believe the presentation of results on a constant currency basis in addition to GAAP results helps improve the ability to understand our performance because they exclude the effects of foreign currency volatility that are not indicative of our core operating results. Constant currency information compares results between periods as if exchange rates had remained constant period over period. We define constant currency revenues as total revenues excluding the effect of foreign exchange rate movements and hedging activities, and use it to determine the constant currency revenue percentage change on a year-over-year basis. Constant currency revenues are calculated by translating current period revenues using prior period exchange rates, as well as excluding any hedging effects realized in the current period. Constant currency revenue percentage change is calculated by determining the change in current period revenues over prior period revenues where current period foreign currency revenues are translated using prior period exchange rates and hedging effects are excluded from revenues of both periods. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with GAAP. 38
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The following table presents the foreign exchange effect on our international revenues and total revenues (in millions, except percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2021 2020 2021
EMEA revenues $ 13,924 $ 19,839 $ 38,132 $ 55,954
Exclude foreign exchange effect on current
period revenues using prior year rates (250) (490) 346 (2,844)
EMEA constant currency revenues $ 13,674 $ 19,349 $ 38,478 $ 53,110
Prior period EMEA revenues $ 12,565 $ 13,924 $ 36,546 $ 38,132
EMEA revenue percentage change 11 % 42 % 4 % 47 %
EMEA constant currency revenue percentage change 9 % 39 % 5 % 39 %
APAC revenues $ 8,458 $ 11,705 $ 22,641 $ 33,391
Exclude foreign exchange effect on current
period revenues using prior year rates 1 (8) 167 (721)
APAC constant currency revenues $ 8,459 $ 11,697 $ 22,808 $ 32,670
Prior period APAC revenues $ 6,814 $ 8,458 $ 19,446 $ 22,641
APAC revenue percentage change 24 % 38 % 16 % 47 %
APAC constant currency revenue percentage change 24 % 38 % 17 % 44 %
Other Americas revenues $ 2,371 $ 3,688 $ 6,367 $ 9,957
Exclude foreign exchange effect on current
period revenues using prior year rates 304 (117) 640 (38)
Other
$ 7,007 $ 9,919 Prior period Other Americas revenues$ 2,290 $ 2,371 $ 6,320 $ 6,367 Other Americas revenue percentage change 4 % 56 % 1 % 56 % OtherAmericas constant currency revenue percentage change 17 % 51 % 11 % 56 % United States revenues$ 21,442 $ 29,824 $ 58,311 $ 83,064 United States revenue percentage change 15 % 39 % 10 % 42 % Hedging gains (losses)$ (22) $ 62 $ 178 $ (54) Total revenues$ 46,173 $ 65,118 $ 125,629 $ 182,312 Total constant currency revenues$ 46,250 $ 64,441 $ 126,604 $ 178,763 Prior period revenues, excluding hedging effect(1)$ 40,380 $ 46,195 $ 115,418 $ 125,451 Total revenue percentage change 14 % 41 % 9 % 45 % Total constant currency revenue percentage change 15 % 39 % 10 % 42 % (1) Total revenues and hedging gains (losses) were$40,499 million and$119 million , respectively, for the three months endedSeptember 30, 2019 and$115,782 million and$364 million , respectively, for the nine months endedSeptember 30, 2019 . EMEA revenue percentage change from the three months endedSeptember 30, 2020 to the three months endedSeptember 30, 2021 was favorably affected by foreign currency exchange rates, primarily due to theU.S. dollar weakening relative to the British pound and Euro. EMEA revenue percentage change from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 was favorably affected by foreign currency exchange rates, primarily due to theU.S. dollar weakening relative to the Euro and British pound. APAC revenue percentage change from the three months endedSeptember 30, 2020 to the three months endedSeptember 30, 2021 was not materially affected by foreign currency exchange rates. APAC revenue percentage change from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30 , 39
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2021 was favorably affected by foreign currency exchange rates, primarily due to theU.S. dollar weakening relative to the Australian dollar. OtherAmericas revenue percentage change from the three months endedSeptember 30, 2020 to the three months endedSeptember 30, 2021 was favorably affected by changes in foreign currency exchange rates, primarily due to theU.S. dollar weakening relative to the Canadian dollar. OtherAmericas revenue percentage change from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 was not materially affected by changes in foreign currency exchange rates, as the effect of theU.S. dollar weakening relative to the Canadian dollar was largely offset by theU.S. dollar strengthening relative to the Brazilian real. Costs and Operating Expenses Cost of Revenues Cost of revenues includes TAC which are paid to our distribution partners, who make available our search access points and services, and amounts paid to$ 8,166 $ 11,498 $ 22,312 $ 32,139 Other cost of revenues 12,951 16,123 36,340 45,812 Total cost of revenues$ 21,117 $ 27,621 $ 58,652 $ 77,951 Total cost of revenues as a percentage of revenues 45.7 % 42.4 % 46.7 % 42.8 % Cost of revenues increased$6.5 billion from the three months endedSeptember 30, 2020 to the three months endedSeptember 30, 2021 . The increase was due to increases in TAC and other cost of revenues of$3.3 billion and$3.2 billion , respectively. Cost of revenues increased$19.3 billion from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 . The increase was due to increases in TAC and other cost of revenues of$9.8 billion and$9.5 billion , respectively. The increase in other cost of revenues from the three and nine months endedSeptember 30, 2020 to the three and nine months endedSeptember 30, 2021 was primarily due to increases in content acquisition costs primarily for YouTube as well as data center and other operations costs. The increase in data center and other operations costs was partially offset by a reduction in depreciation expense due to the change in the estimated useful life of our servers and certain network equipment beginning in the first quarter of 2021. The increase in TAC from the three and nine months endedSeptember 30, 2020 to the three and nine months endedSeptember 30, 2021 was due to increases in TAC paid to distribution partners and toSeptember 30, 2020 to the three months endedSeptember 30, 2021 and decreased from 22.2% to 21.7% from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 primarily due to a revenue mix shift from
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properties toSeptember 30, 2020 to the three and nine months endedSeptember 30, 2021 . Over time, cost of revenues as a percentage of total revenues may be affected by a number of factors, including the following: •The amount of TAC paid to distribution partners, which is affected by changes in device mix, geographic mix, partner mix, partner agreement terms such as revenue share arrangements, and the percentage of queries channeled through paid access points; •The amount of TAC paid to$ 6,856 $ 7,694 $ 20,551 $ 22,854 Research and development expenses as a percentage of revenues 14.8 % 11.8 % 16.4 % 12.5 % R&D expenses consist primarily of: •Compensation expenses (including SBC) for engineering and technical employees responsible for R&D of our existing and new products and services; •Depreciation; •Equipment-related expenses; and •Professional services fees primarily related to consulting and outsourcing services. R&D expenses increased$838 million from the three months endedSeptember 30, 2020 to the three months endedSeptember 30, 2021 . The increase was primarily due to an increase in compensation expenses of$725 million , largely resulting from a 12% increase in headcount. R&D expenses increased$2.3 billion from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 . The increase was primarily due to an increase in compensation expenses of$2.4 billion , largely resulting from an 11% increase in headcount. This increase was partially offset by a reduction in depreciation expense of$430 million including the effect of our change in the estimated useful life of our servers and certain network equipment. Over time, R&D expenses as a percentage of revenues may fluctuate due to certain expenses that are generally less variable in nature and may not correlate to the changes in revenues. In addition, R&D expenses may be affected by a number of factors including continued investment in ads, Android, Chrome, Google Cloud, Google Maps,
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Sales and Marketing The following table presents our sales and marketing expenses (in millions, except percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2021 2020 2021
Sales and marketing expenses $ 4,231 $ 5,516 $ 12,632 $ 15,308
Sales and marketing expenses as a percentage of
revenues 9.2 % 8.5 % 10.1 % 8.4 %
Sales and marketing expenses consist primarily of:
•Advertising and promotional expenditures related to our products and services;
and
•Compensation expenses (including SBC) for employees engaged in sales and
marketing, sales support, and certain customer service functions.
Sales and marketing expenses increased $1.3 billion from the three months ended
September 30, 2020 to the three months ended September 30, 2021 , primarily
driven by an increase in compensation expenses of $612 million and in
advertising and promotional activities of $558 million . The increase in
compensation expenses was largely due to a 16% increase in headcount. The
increase in advertising and promotional activities was driven by both increased
spending in the current period and a reduction in spending in the prior year
comparable period due to COVID-19.
Sales and marketing expenses increased $2.7 billion from the nine months ended
September 30, 2020 to the nine months ended September 30, 2021 , primarily driven
by an increase in compensation expenses of $1.5 billion and advertising and
promotional activities of $1.2 billion . The increase in compensation expenses
was largely due to a 12% increase in headcount. The increase in advertising and
promotional activities was driven by both increased spending in the current
period and a reduction in spending in the prior year comparable period due to
COVID-19.
Over time, sales and marketing expenses as a percentage of revenues may
fluctuate due to certain expenses that are generally less variable in nature and
may not correlate to the changes in revenues. In addition, sales and marketing
expenses may be affected by a number of factors including the seasonality
associated with new product and service launches and strategic decisions
regarding the timing and extent of our spending.
General and Administrative
The following table presents our general and administrative expenses (in
millions, except percentages):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2021 2020 2021
General and administrative expenses $ 2,756 $
3,256
6.0 % 5.0 % 6.5 % 5.1 %
General and administrative expenses consist primarily of:
•Compensation expenses (including SBC) for employees in our finance, human
resources, information technology, and legal organizations;
•Depreciation;
•Equipment-related expenses;
•Legal-related expenses; and
•Professional services fees primarily related to audit, information technology
consulting, outside legal, and outsourcing services.
General and administrative expenses increased $500 million from the three months
ended September 30, 2020 to the three months ended September 30, 2021 . The
increase was primarily driven by a $314 million increase in charges related to
legal matters and a $179 million increase in compensation expenses, largely
resulting from a 13% increase in headcount.
General and administrative expenses increased $1.1 billion from the nine months
ended September 30, 2020 to the nine months ended September 30, 2021 . The
increase was primarily driven by a $1.3 billion increase in charges relating to
legal matters and a $409 million increase in compensation expenses, largely
resulting from a 13% increase in headcount. These increases were partially
offset by a $844 million decline in allowance for credit
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losses for accounts receivable, as the prior year comparable period reflected a
higher allowance related to the economic impact of COVID-19.
Over time, general and administrative expenses as a percentage of revenues may
fluctuate due to certain expenses that are generally less variable in nature and
may not correlate to the changes in revenues, the effect of discrete items such
as legal settlements, or allowances for credit losses for accounts receivable.
Segment Profitability
The following table presents our segment operating income (loss) (in millions).
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2021 2020 2021
Operating income (loss):
Google Services $ 14,453 $ 23,973 $ 35,540 $ 65,862
Google Cloud (1,208) (644) (4,364) (2,209)
Other Bets (1,103) (1,288) (3,340) (3,831)
Corporate costs, unallocated (929) (1,010) (2,263) (2,993)
Total income from operations $ 11,213 $ 21,031 $ 25,573 $ 56,829
Google Services
Google Services operating income increased $9.5 billion from the three months
ended September 30, 2020 to the three months ended September 30, 2021 . The
increase was due to growth in revenues partially offset by increases in TAC,
content acquisition costs, compensation expenses and advertising and promotional
expenses. The increase in expenses was partially offset by a reduction in costs
driven by the change in the estimated useful life of our servers and certain
network equipment. The effect of COVID-19 on the prior year comparable period
results affected the year-over-year increase in operating income.
Google Services operating income increased $30.3 billion from the nine months
ended September 30, 2020 to the nine months ended September 30, 2021 . The
increase was due to growth in revenues partially offset by increases in TAC,
content acquisition costs, compensation expenses, charges related to certain
legal matters and advertising and promotional expenses. The increase in expenses
was partially offset by a reduction in costs driven by the change in the
estimated useful life of our servers and certain network equipment. The effect
of COVID-19 on prior year comparable period results affected the year-over-year
increase in operating income.
Google Cloud
Google Cloud operating loss decreased $564 million and $2.2 billion from the
three and nine months ended September 30, 2020 to the three and nine months
ended September 30, 2021 , respectively. The decrease in operating loss was
primarily driven by growth in revenues, partially offset by an increase in
expenses, primarily driven by compensation expenses. The increase in expenses
was partially offset by a reduction in costs driven by the change in the
estimated useful life of our servers and certain network equipment.
Other Bets
Other Bets operating loss increased $185 million and $491 million from the three
and nine months ended September 30, 2020 to the three and nine months ended
September 30, 2021 , respectively. The increase in operating loss for the three
and nine months ended September 30, 2021 was primarily driven by increases in
compensation expenses, including an increase in valuation-based compensation
charges during the second quarter of 2021.
Other Income (Expense), Net
The following table presents other income (expense), net (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2021 2020 2021
Other income (expense), net
Other income (expense), net, decreased$113 million from the three months endedSeptember 30, 2020 to the three months endedSeptember 30, 2021 . The change was primarily driven by an increase in accrued performance 43
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fees related to certain investments of$357 million during the three months endedSeptember 30, 2021 , offset by increases in net unrealized gains recognized for our equity securities of$222 million and income from equity method investments of$162 million . Other income (expense), net, increased$5.7 billion from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 . The change was primarily driven by increases in net unrealized gains recognized for our marketable and non-marketable equity securities of$1.4 billion and$5.8 billion , respectively, during the nine months endedSeptember 30, 2021 , partially offset by an increase in accrued performance fees related to certain investments of$1.5 billion . Over time, other income (expense), net, may be affected by market dynamics and other factors. Equity values generally change daily for marketable equity securities and upon the occurrence of observable price changes or upon impairment of non-marketable equity securities. Changes in our share of gains and losses in equity method investments may fluctuate. In addition, volatility in the global economic climate and financial markets could result in a significant change in the value of our investments. Fluctuations in the value of these investments has, and we expect will continue to, contribute to volatility of OI&E in future periods. For additional information about our investments, see Note 3 of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Provision for Income Taxes The following table presents our provision for income taxes (in millions, except for effective tax rate): Three Months Ended Nine Months Ended September 30, September 30, 2020 2021 2020 2021 Provision for income taxes$ 2,112 $ 4,128 $ 4,351 $ 10,941 Effective tax rate 15.8 % 17.9 % 14.8 % 16.5 % Our provision for income taxes and our effective tax rate increased from the three months endedSeptember 30, 2020 to the three months endedSeptember 30, 2021 . The increase in the provision for income taxes was primarily due to an increase in pre-tax earnings, including in countries that have higher statutory rates and an increase in unrecognized tax benefits, partially offset by an increase in the stock-based compensation related tax benefit. Our provision for income taxes and our effective tax rate increased from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 . The increase in the provision for income taxes and our effective tax rate was primarily due to an increase in pre-tax earnings, including in countries that have higher statutory rates, partially offset by an increase in the stock-based compensation related tax benefit, and theU.S. federal Foreign-Derived Intangible Income tax deduction benefit. We expect our future effective tax rate to be affected by changes in pre-tax earnings, including the effect of countries with different statutory rates. Additionally, our future effective tax rate may be affected by changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws or regulations, as well as certain discrete items. Financial Condition Cash, Cash Equivalents, andMarketable Securities As ofSeptember 30, 2021 , we had$142.0 billion in cash, cash equivalents, and short-term marketable securities. Cash equivalents and marketable securities are comprised of time deposits, money market funds, highly liquid government bonds, corporate debt securities, mortgage-backed and asset-backed securities and marketable equity securities. Sources, Uses of Cash and Related Trends Our principal sources of liquidity are our cash, cash equivalents, and marketable securities, as well as the cash flow that we generate from our operations. The primary use of capital continues to be to invest for the long-term growth of the business. We regularly evaluate our cash and capital structure, including the size, pace and form of capital return to stockholders. 44
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The following table presents our cash flows (in millions):
Nine Months Ended
September 30,
2020 2021
Net cash provided by operating activities
Cash Provided by Operating Activities Our largest source of cash provided by our operations are advertising revenues generated by Google Search & other properties,September 30, 2020 to the nine months endedSeptember 30, 2021 primarily due to the net effect of increases in cash received from revenues and cash paid for cost of revenues and operating expenses, and changes in operating assets and liabilities, including the timing of income tax payments. Cash Used in Investing Activities Cash provided by investing activities consists primarily of maturities and sales of our investments in marketable and non-marketable securities. Cash used in investing activities consists primarily of purchases of marketable and non-marketable securities, purchases of property and equipment, and payments for acquisitions. Net cash used in investing activities decreased from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 primarily due to decreases in purchases of marketable securities offset by a decrease in maturities and sales of marketable securities and an increase in purchases of property and equipment. Cash Used in Financing Activities Cash provided by financing activities consists primarily of proceeds from issuance of debt and proceeds from the sale of interest in consolidated entities. Cash used in financing activities consists primarily of repurchases of common and capital stock, net payments related to stock-based award activities, and repayments of debt. Net cash used in financing activities increased from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 primarily due to increases in cash payments for repurchases of common and capital stock, net payments related to stock-based award activities, and repayment of debt. Liquidity and Material Cash Requirements We expect existing cash, cash equivalents, short-term marketable securities, cash flows from operations and financing activities to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for at least the next 12 months and thereafter for the foreseeable future. As ofSeptember 30, 2021 , we had long-term taxes payable of$5.6 billion related to a one-time transition tax payable incurred as a result of theU.S. Tax Cuts and Jobs Act ("Tax Act"). As permitted by the Tax Act, we will pay the transition tax in annual interest-free installments through 2025. In 2017, 2018 and 2019, the EC announced decisions that certain actions taken by$2.7 billion as ofJune 27, 2017 ), €4.3 billion ($5.1 billion as ofJune 30, 2018 ), and €1.5 billion ($1.7 billion as ofMarch 20, 2019 ), respectively. While each EC decision is under appeal, we included the fines in accrued expenses and other current liabilities on our Consolidated Balance Sheets as we provided bank guarantees (in lieu of a cash payment) for the fines. We have a short-term debt financing program of up to$10.0 billion through the issuance of commercial paper, which increased from$5.0 billion inSeptember 2021 . Net proceeds from this program are used for general corporate purposes. As ofSeptember 30, 2021 , we had no commercial paper outstanding. As ofSeptember 30, 2021 , we had$10.0 billion of revolving credit facilities with no amounts outstanding. InApril 2021 , we terminated the 45
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existing revolving credit facilities, which were scheduled to expire inJuly 2023 , and entered into two new revolving credit facilities in the amounts of$4.0 billion and$6.0 billion , which will expire inApril 2022 andApril 2026 , respectively. The interest rates for the new credit facilities are determined based on a formula using certain market rates, as well as our progress toward the achievement of certain sustainability goals. No amounts have been borrowed under the new credit facilities. As ofSeptember 30, 2021 , we have senior unsecured notes outstanding due from 2024 through 2060 with a total carrying value of$12.8 billion . Refer to Note 5 of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the notes. InApril 2021 , the Board of Directors of Alphabet authorized the company to repurchase up to$50.0 billion of its Class C stock. InJuly 2021 , the Alphabet board approved an amendment to theApril 2021 authorization, permitting the company to repurchase both Class A and Class C shares in a manner deemed in the best interest of the company and its stockholders, taking into account the economic cost and prevailing market conditions, including the relative trading prices and volumes of the Class A and Class C shares. In accordance with the authorization of the Board of Directors of Alphabet, during the three and nine months endedSeptember 30, 2021 , we repurchased and subsequently retired 4.6 million and 15.7 million aggregate shares for$12.6 billion and$36.8 billion , respectively. Of the aggregate amount repurchased and subsequently retired during the three months endedSeptember 30, 2021 , 0.5 million shares were Class A stock for$1.5 billion . As ofSeptember 30, 2021 ,$30.8 billion remains available for repurchase of Class A and Class C shares under the amended authorization. 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 Rule 10b5-1 plans. The repurchase program does not have an expiration date. Refer to Note 10 of the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Capital Expenditures and Leases We make investments in land and buildings for data centers and offices and information technology assets through purchases of property and equipment and lease arrangements to provide capacity for the growth of our services and products. InSeptember 2021 we exercised our option to purchaseSt. John's Terminal inNew York City for approximately$2.1 billion , which is expected to close in the first quarter of 2022. During the nine months endedSeptember 30, 2020 and 2021, we spent$16.8 billion and$18.3 billion on capital expenditures and recognized total operating lease assets of$2.2 billion and$2.2 billion , respectively. As ofSeptember 30, 2021 , the amount of total future lease payments under operating leases, which had a weighted average remaining lease term of 8 years, was$15.5 billion . As ofSeptember 30, 2021 , we have entered into leases that have not yet commenced with future lease payments of$6.3 billion , excluding purchase options, that are not yet recorded on our Consolidated Balance Sheets. These leases will commence between 2021 and 2026 with non-cancelable lease terms of 1 to 25 years. For the nine months endedSeptember 30, 2020 and 2021, our depreciation and impairment expenses on property and equipment were$9.4 billion and$8.3 billion , respectively. The change in estimated useful life of our servers and certain network equipment was effective beginning in fiscal year 2021. The effect of this change in accounting estimate was a reduction in depreciation expense of$2.1 billion for the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2020 and 2021, our operating lease expenses (including variable lease costs), were$2.1 billion and$2.5 billion , respectively. Finance leases were not material for the nine months endedSeptember 30, 2020 and 2021. Critical Accounting Policies and Estimates See Part II, Item 7, "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . There have been no material changes to our critical accounting policies and estimates since our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Available Information Our website is located at www.abc.xyz, and our investor relations website is located at www.abc.xyz/investor. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and our Proxy Statements, and any amendments to these reports, are available through our investor relations website, free of charge, after we file them with theSEC . We also provide a link to the section of theSEC's website at www.sec.gov that has all of the reports that we file or furnish with theSEC . We webcast via our investor relations website our earnings calls and certain events we participate in or host with members of the investment community. Our investor relations website also provides notifications of news or announcements regarding our financial performance and other items of interest to our investors, includingSEC 46
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filings, investor events, press and earnings releases, and blogs. We also share Google news and product updates on Google's Keyword blog at https://www.blog.google/, which may be of interest or material to our investors. Further, corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters, and code of conduct, is also available on our investor relations website under the heading "Other." The content of our websites are not incorporated by reference into this Quarterly Report on Form 10-Q or in any other report or document we file with theSEC , and any references to our websites are intended to be inactive textual references only.
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