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 II, Item 8 of this Annual Report on Form 10-K. We have omitted discussion of 2017 results where it would be redundant to the discussion previously included in Part II, Item 7 of our 2018 Annual Report on Form 10-K, as amended. Trends in Our Business The following trends have contributed to the results of our consolidated operations, and we anticipate that they will continue to affect our future results: •Users' behaviors and advertising continue to shift online as the digital economy evolves. The continuing shift from an offline to online world has contributed to the growth of our business since inception, contributing to revenue growth, and we expect that this online shift will continue to benefit our business. •Users are increasingly using diverse devices and modalities to access our products and services, and our advertising revenues are increasingly coming from new formats. Our users are accessing the Internet via diverse devices and modalities, such as smartphones, wearables and smart home devices, and want to feel connected no matter where they are or what they are doing. We seek to expand our products and services to stay in front of these trends in order to maintain and grow our business. We generate our advertising revenues increasingly from different channels, including mobile, and newer advertising formats, and the margins from the advertising revenues from these channels and newer products have generally been lower than those from traditional desktop search. Additionally, as the market for a particular device type or modality matures our revenues may be affected. For example, growth in the global smartphone market has slowed due to various factors, including increased market saturation in developed countries, which can affect our mobile advertising revenue growth rates. We expect TAC paid to our distribution partners to increase as our revenues grow and to be affected by changes in device mix; geographic mix; partner mix; partner agreement terms; and the percentage of queries channeled through paid access points. We expect these trends to continue to put pressure on our overall margins and affect our revenue growth rates. •As online advertising evolves, we continue to expand our product offerings which may affect our monetization. As interactions between users and advertisers change and as online user behavior evolves, we continue to expand and evolve our product offerings to serve their changing needs. Over time, we expect our monetization trends to fluctuate. For example, we have seen an increase in YouTube engagement ads, which monetize at a lower rate than traditional search ads. •As users in developing economies increasingly come online, our revenues from international markets continue to increase and movements in foreign exchange rates affect such revenues. The shift to online, as well as the advent of the multi-device world, has brought opportunities outside of theU.S. , including in emerging markets, and we continue to develop localized versions of our products and relevant advertising programs useful to our users in these markets. This has led to a trend of increased revenues from international markets over time and we expect that our results will continue to be affected by our performance in these markets, particularly as low-cost mobile devices become more available. This trend could impact our margins as developing markets initially monetize at a lower rate than more mature markets. Our international revenues represent a significant portion of our revenues and are subject to fluctuations in foreign currency exchange rates relative to theU.S. dollar. While we have a foreign exchange risk management program designed to reduce our exposure to these fluctuations, this program does not fully offset their effect on our revenues and earnings. 27
--------------------------------------------------------------------------------
Table of Contents
•The portion of our revenues that we derive from non-advertising revenues is increasing and may affect margins. Non-advertising revenues have grown over time. We expect this trend to continue as we focus on expanding our offerings to our users through products and services like
investing in them.
Our employees are among our best assets and are critical for our continued success. We expect to continue hiring talented employees around the globe and to provide competitive compensation programs to our employees. Executive Overview of Results Below are our key financial results for the fiscal year endedDecember 31, 2019 (consolidated unless otherwise noted): • Revenues of$161.9 billion and revenue growth of 18% year over year, constant currency revenue growth of 20% year over year.
•
over year and Other Bets revenues of
11% year over year.
• Revenues from
billion,
• Cost of revenues was
other cost of revenues of
advertising revenues (TAC rate) was 22.3%.
• Operating expenses (excluding cost of revenues) were
• Income from operations was
• Other income (expense), net, was
• Effective tax rate was 13%.
• Net income was
• Operating cash flow was
• Capital expenditures were
• Number of employees was 118,899 as of
new hires during the year were engineers and product managers. By product
area, the largest headcount additions were in
Information about Segments We operate our business in multiple operating segments.
--------------------------------------------------------------------------------
Table of Contents
Our reported segments are:
•
hardware, Google Cloud, Google Maps,
technical infrastructure is also included in
revenues primarily from advertising; sales of apps, in-app purchases,
digital content products, and hardware; and licensing and service fees,
including fees received for Google Cloud offerings and subscription-based
products.
• Other Bets - Other Bets is a combination of multiple operating segments
that are not individually material. Other Bets includes Access, Calico,
CapitalG, GV, Verily, Waymo, and X, among others. Revenues from the Other
Bets are derived primarily through the sales of internet and TV services
through Access as well as licensing and R&D services through Verily.
Revenues
The following table presents our revenues by segment and revenue source (in millions). Certain amounts in prior periods have been reclassified to conform with current period presentation.
Year Ended December 31,
2017 2018 2019
Google Search & other $ 69,811 $ 85,296 $ 98,115
YouTube ads(1) 8,150 11,155 15,149
Google properties 77,961 96,451 113,264
Google Network Members' properties 17,616 20,010 21,547
Google advertising 95,577 116,461 134,811
Google Cloud 4,056 5,838 8,918
Google other(1) 10,914 14,063 17,014
Google revenues 110,547 136,362 160,743
Other Bets revenues 477 595 659
Hedging gains (losses) (169 ) (138 ) 455
Total revenues $ 110,855 $ 136,819 $ 161,857 (1) YouTube non-advertising revenues are included in
• changes in advertising quality, formats, delivery or policy;
• changes in device mix;
• changes in foreign currency exchange rates;
• fees advertisers are willing to pay based on how they manage their
advertising costs;
• general economic conditions;
• seasonality; and
• traffic growth in emerging markets compared to more mature markets and
across various advertising verticals and channels.
Our advertising revenue growth rate has been affected over time as a result of a
number of factors, including challenges in maintaining our growth rate as
revenues increase to higher levels; changes in our product mix; changes in
advertising quality or formats and delivery; the evolution of the online
advertising market; increasing competition; our investments in new business
strategies; query growth rates; and shifts in the geographic mix of our
revenues. We also expect that our revenue growth rate will continue to be
affected by evolving user preferences, the acceptance by users of our products
and services as they are delivered on diverse devices and modalities, our
ability to create a seamless experience for both users and advertisers, and
movements in foreign currency exchange rates.
29--------------------------------------------------------------------------------
Table of Contents
The following table presents our
Year Ended December 31,
2017 2018 2019
Google Search & other $ 69,811 $ 85,296 $ 98,115
YouTube ads(1) 8,150 11,155 15,149
Google Network Members' properties 17,616 20,010 21,547
Google advertising$ 95,577 $ 116,461 $ 134,811
% 83.9 %
(1) YouTube non-advertising revenues are included in
properties (including revenues from traffic generated by search
distribution partners who use Google.com as their default search in
browsers, toolbars, etc.) and other
like Gmail, Google Maps, and Google Play;
• YouTube ads consists of revenues generated primarily on YouTube
properties; and
•
on
$12,819 million from 2018 to 2019. The growth was primarily driven by interrelated factors including increases in search queries resulting from ongoing growth in user adoption and usage, primarily on mobile devices, continued growth in advertiser activity, and improvements we have made in ad formats and delivery. Revenue growth was partially offset by the general strengthening of theU.S. dollar compared to certain foreign currencies. Our Google Search & other revenues increased$15,485 million from 2017 to 2018. The growth was primarily driven by increases in mobile search resulting from ongoing growth in user adoption and usage, as well as continued growth in advertiser activity. Growth was also driven by improvements in ad formats and delivery, primarily on desktop. Additionally, revenue growth was favorably affected by the general weakening of theU.S. dollar compared to certain foreign currencies. YouTube ads YouTube ads revenues increased$3,994 million from 2018 to 2019 and increased$3,005 million from 2017 to 2018. The largest contributors to the growth during both periods were our direct response and brand advertising products, both of which benefited from improvements to ad formats and delivery and increased advertiser spending.$1,537 million from 2018 to 2019. The growth was primarily driven by strength in both AdManager (included in what was previously referred to as programmatic advertising buying) and AdMob, partially offset by the general strengthening of theU.S. dollar compared to certain foreign currencies. Our$2,394 million from 2017 to 2018, primarily driven by strength in both AdMob and AdManager, offset by a decline in our traditional AdSense businesses. Additionally, the growth was favorably affected by the general weakening of theU.S. dollar compared to certain foreign currencies. Use of Monetization Metrics Paid clicks for our
--------------------------------------------------------------------------------
Table of Contents
Cost-per-impression is defined as impression-based and click-based revenues divided by our total number of impressions and represents the average amount we charge advertisers for each impression displayed to users. As our business evolves, we periodically review, refine and update our methodologies for monitoring, gathering, and counting the number of paid clicks on ourU.S. dollar compared to certain foreign currencies.
2018 2019
Impressions change 2 % 9 %
Cost-per-impression change 12 % 1 %
Impressions increased from 2018 to 2019 primarily due to growth in
AdManager. The cost-per-impression was relatively unchanged due to 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 the U.S. dollar compared to certain
foreign currencies.
Google Cloud
The following table presents our Google Cloud revenues (in millions):
Year Ended December 31,
2017 2018 2019
Google Cloud $ 4,056 $ 5,838 $ 8,918
Google Cloud revenues as a percentage of Google
segment revenues 3.7 % 4.3 % 5.5 %
analytics, and other services
• G Suite productivity tools; and
• other enterprise cloud services.
Our$3,080 million from 2018 to 2019 and increased$1,782 million from 2017 to 2018. The growth during both periods was primarily driven by continued strength in our GCP and G Suite offerings. Our infrastructure and our data and analytics platform products have been the largest drivers of growth in GCP. 31
--------------------------------------------------------------------------------
Table of Contents
10.6 %
purchases (which we recognize net of payout to developers) and digital
content sold in the
• hardware, including Google
and other devices;
• YouTube non-advertising, including YouTube Premium and YouTube TV
subscriptions and other services; and
• other products and services.
Our$2,951 million from 2018 to 2019. The growth was primarily driven by$3,149 million from 2017 to 2018. The growth was primarily driven by$ 477 $ 595
Other Bets revenues consist primarily of revenues from sales of Access internet
and TV services and Verily licensing and R&D services.
Revenues by Geography
The following table presents our revenues by geography as a percentage of
revenues, determined based on the addresses of our customers:
Year Ended December 31,
2018 2019
United States 46 % 46 %
EMEA 33 % 31 %
APAC 15 % 17 %
Other Americas 6 % 6 %
For further details on revenues by geography, see Note 2 of the Notes to
Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K.
Use of Constant Currency Revenues and Constant Currency Revenue Growth
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 the U.S. dollar weakens relative to other foreign
currencies, and unfavorably affected as the U.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 constant currency revenue growth
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 U.S. Generally Accepted Accounting
Principles (GAAP) results helps improve
32--------------------------------------------------------------------------------
Table of Contents
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 growth on a year-on-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 growth (expressed as a percentage) is calculated by
determining the increase 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.
33--------------------------------------------------------------------------------
Table of Contents
The following table presents the foreign exchange effect on our international revenues and total revenues (in millions):
Year Ended December 31,
2018 2019
EMEA revenues $ 44,739 $ 50,645
Exclude foreign exchange effect on current period
revenues using prior year rates (1,325 ) 2,397
EMEA constant currency revenues$ 43,414 $ 53,042 Prior period EMEA revenues$ 36,236 $ 44,739 EMEA revenue growth 23 % 13 % EMEA constant currency revenue growth 20 %
19 %
APAC revenues$ 21,341 $
26,928
Exclude foreign exchange effect on current period revenues using prior year rates (49 )
388
APAC constant currency revenues$ 21,292 $ 27,316 Prior period APAC revenues$ 16,192 $ 21,341 APAC revenue growth 32 % 26 % APAC constant currency revenue growth 31 %
28 %
Other Americas revenues$ 7,608 $
8,986
Exclude foreign exchange effect on current period revenues using prior year rates 404
541
Other Americas constant currency revenues$ 8,012 $
9,527
Prior period Other Americas revenues$ 6,147 $
7,608
Other Americas revenue growth 24 % 18 % Other Americas constant currency revenue growth 30 % 25 % United States revenues$ 63,269 $ 74,843 United States revenue growth 21 % 18 % Hedging gains (losses) (138 ) 455 Total revenues$ 136,819 $ 161,857 Total constant currency revenues$ 135,987 $
164,728
Prior period revenues, excluding hedging effect(1)
136,957
Total revenue growth 23 % 18 % Total constant currency revenue growth 22 %
20 %
(1) Total revenues and hedging gains (losses) for the year ended
2017 were
Our EMEA revenue growth from 2018 to 2019 was unfavorably affected by changes in foreign currency exchange rates, primarily due to theU.S. dollar strengthening relative to the Euro and British pound. Our APAC revenue growth from 2018 to 2019 was unfavorably affected by changes in foreign currency exchange rates primarily due to theU.S. dollar strengthening relative to the Australian dollar and South Korean won, partially offset by theU.S. dollar weakening relative to the Japanese yen. Our Other Americas revenue growth from 2018 to 2019 was unfavorably affected by changes in foreign currency exchange rates, primarily due to theU.S. dollar strengthening relative to the Brazilian real and Argentine peso. 34
--------------------------------------------------------------------------------
Table of ContentsAlphabet Inc. Costs and Expenses Cost of Revenues Cost of revenues consists of TAC which are paid to
providers from whom we license video and other content for distribution on
YouTube advertising and subscription services and
to these content providers based on revenues generated or a flat fee);
• Expenses associated with our data centers and other operations (including
bandwidth, compensation expenses (including stock-based compensation
(SBC)), depreciation, energy, and other equipment costs); and
• Inventory related costs for hardware we sell.
The following tables present our cost of revenues, including TAC (in millions):
Year Ended December 31,
2018 2019
TAC $ 26,726 $ 30,089
Other cost of revenues 32,823 41,807
Total cost of revenues $ 59,549 $ 71,896 Total cost of revenues as a percentage of revenues 43.5 % 44.4 %
Cost of revenues increased$12,347 million from 2018 to 2019. The increase was due to increases in other cost of revenues and TAC of$8,984 million and$3,363 million , respectively. The increase in other cost of revenues from 2018 to 2019 was due to an increase in data center and other operations costs. Additionally, there was an increase in content acquisition costs for YouTube consistent with the growth in YouTube revenues. The increase in TAC from 2018 to 2019 was due to increases in TAC paid to distribution partners and to
combination of factors such as geographic mix, product mix, revenue share
terms, and fluctuations of the
currencies;
• The amount of TAC paid to distribution partners, which is affected bychanges in device mix, geographic mix, partner mix, partner agreement
terms such as revenue share arrangements, and the percentage of queries
channeled through paid access points;
• Relative revenue growth rates of
Members' properties;
• Costs associated with our data centers and other operations to support
ads,
• Content acquisition costs, which are primarily affected by the relative
growth rates in our YouTube advertising and subscription revenues;
• Costs related to hardware sales; and
• Increased proportion of non-advertising revenues, which generally have
higher costs of revenues, relative to our advertising revenues.
35--------------------------------------------------------------------------------
Table of Contents
Research and Development
The following table presents our R&D expenses (in millions):
Year Ended
2018 2019
Research and development expenses$ 21,419
15.7 % 16.1 %
R&D expenses consist primarily of: • Compensation expenses (including SBC) and facilities-related costs for
engineering and technical employees responsible for R&D of our existing
and new products and services;
• Depreciation expenses;
• Equipment-related expenses; and
• Professional services fees primarily related to consulting and outsourcing
services.
R&D expenses increased$4,599 million from 2018 to 2019. The increase was primarily due to an increase in compensation expenses (including SBC) and facilities-related costs of$3,519 million , largely resulting from a 23% increase in headcount. Over time, R&D expenses as a percentage of revenues may be affected by a number of factors including continued investment in ads, Android, Chrome, Google Cloud, Google Play, hardware, machine learning, Other Bets, and Search. Sales and Marketing The following table presents our sales and marketing expenses (in millions): Year Ended December 31, 2018 2019 Sales and marketing expenses$ 16,333 $ 18,464 Sales and marketing expenses as a percentage of revenues 11.9 %
11.4 %
Sales and marketing expenses consist primarily of:
• Advertising and promotional expenditures related to our products and
services; and
• Compensation expenses (including SBC) and facilities-related costs for
employees engaged in sales and marketing, sales support, and certain
customer service functions.
Sales and marketing expenses increased $2,131 million from 2018 to 2019. The
increase was primarily due to an increase in compensation expenses (including
SBC) and facilities-related costs of $1,371 million , largely resulting from a
15% increase in headcount. In addition, there was an increase in advertising and
promotional expenses of $402 million .
Over time, sales and marketing expenses as a percentage of revenues may be
affected by a number of factors including the seasonality associated with new
product and service launches.
General and Administrative
The following table presents our general and administrative expenses (in
millions):
Year Ended December 31,
2018 2019
General and administrative expenses $ 6,923
5.1 % 5.9 %
General and administrative expenses consist primarily of:
• Compensation expenses (including SBC) and facilities-related costs for
employees in our finance, human resources, information technology, and
legal organizations;
• Depreciation expenses;
• Equipment-related expenses;
• Legal-related expenses; and
36--------------------------------------------------------------------------------
Table of Contents
• Professional services fees primarily related to audit, information
technology consulting, outside legal, and outsourcing services.
General and administrative expenses increased $2,628 million from 2018 to 2019.
The increase was primarily due to an increase in legal-related expenses of
$1,157 million , including a charge of $554 million from a legal settlement in
2019 and the effect of a legal settlement gain recorded in 2018. Additionally,
there was an increase in compensation expenses (including SBC) and
facilities-related costs of $687 million , largely resulting from a 19% increase
in headcount.
Performance fees of $1,203 million have been reclassified from general and
administrative expenses to other income (expense), net, for 2018 to conform with
current period presentation. See Note 7 of the Notes to Consolidated Financial
Statements included in Part II, Item 8 of this Annual Report on Form 10-K for
further details.
Over time, general and administrative expenses as a percentage of revenues may
be affected by discrete items such as legal settlements.
European Commission Fines
In July 2018 , the EC announced its decision that certain provisions in Google 's
Android-related distribution agreements infringed European competition law. The
EC decision imposed a €4.3 billion ($5.1 billion as of June 30, 2018 ) fine,
which was accrued in the second quarter of 2018.
In March 2019 , the EC announced its decision that certain contractual provisions
in agreements that Google had with AdSense for Search partners infringed
European competition law. The EC decision imposed a €1.5 billion ($1.7
billion as of March 20, 2019 ) fine, which was accrued in the first quarter of
2019.
Please refer to Note 10 of the Notes to Consolidated Financial
Statements included in Part II, Item 8 of this Annual Report on Form 10-K for
further information.
Other Income (Expense), Net
The following table presents other income (expense), net, (in millions):
Year Ended December 31,
2018 2019
Other income (expense), net $ 7,389 $ 5,394
Other income (expense), net, as a percentage of revenues 5.4 % 3.3 %
Other income (expense), net, decreased $1,995 million from 2018 to 2019. This
decrease was primarily driven by a decrease in gains on equity securities, which
were $2,649 million in 2019 as compared to $5,460 million in 2018. The majority
of the gains in both periods were unrealized. The effect of the decrease in
gains on equity securities was partially offset by a decrease in performance
fees. The decrease in other income (expense) was also driven by a decrease in
gains on debt securities primarily due to an unrealized gain recognized in 2018
resulting from the modification of the terms of a non-marketable debt security.
Performance fees of $1,203 million have been reclassified from general and
administrative expenses to other income (expense), net, for 2018 to conform with
current period presentation. See Note 7 of the Notes to Consolidated Financial
Statements included in Part II, Item 8 of this Annual Report on Form 10-K for
further details.
Over time, other income (expense), net, as a percentage of revenues 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. In
addition, volatility in the global economic climate and financial markets could
result in a significant change in the value of our equity securities.
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 equity investments, see Note 1 and Note 3 of the Notes to
Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K.
37--------------------------------------------------------------------------------
Table of Contents
Provision for Income Taxes
The following table presents our provision for income taxes (in millions) and
effective tax rate:
Year Ended December 31,
2018 2019
Provision for income taxes
12.0 % 13.3 %
Our provision for income taxes and our effective tax rate increased from 2018 to
2019, due to discrete events in 2018 and 2019. In 2018, we released our deferred
tax asset valuation allowance related to gains on equity securities and
recognized the benefits of the U.S. Tax Cuts and Jobs Act ("Tax Act"). In 2019,
we recognized an increase in discrete benefits related to the resolution of
multi-year audits, partially offset by the reversal of Altera tax benefit as a
result of the U.S. Court of Appeals decision. See Note 14 of the Notes to
Consolidated Financial Statements included in Part II, Item 8 of this Annual
Report on Form 10-K for further information.
As of December 31, 2019 , we have simplified our corporate legal entity structure
and now license intellectual property from the U.S. that was previously licensed
from Bermuda . This will affect our geographic mix of earnings.
We expect our future effective tax rate to be affected by the geographic mix of
earnings in 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, regulations, or accounting
principles, as well as certain discrete items.
38--------------------------------------------------------------------------------
Table of Contents
Quarterly Results of Operations The following tables presenting our quarterly results of operations should be read in conjunction with the consolidated financial statements and related notes included in Part II, 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. Our operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year. The following table presents our unaudited quarterly results of operations for the eight quarters endedDecember 31, 2019 . This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our consolidated financial position and operating results for the quarters presented. Seasonal fluctuations in internet usage and advertiser expenditures, underlying business trends such as traditional retail seasonality and macroeconomic conditions have affected, and are likely to continue to affect, our business. 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, Jun 30, Sept 30, Dec 31, Mar 31, Jun 30, Sept 30, Dec 31, 2018 2018 2018 2018 2019 2019 2019 2019 (In millions, except per share amounts) (unaudited) Consolidated Statements of Income Data: Revenues$ 31,146 $ 32,657 $ 33,740 $ 39,276 $ 36,339 $ 38,944 $ 40,499 $ 46,075 Costs and expenses: Cost of revenues 13,467 13,883 14,281 17,918 16,012 17,296 17,568 21,020 Research and development 5,039 5,114 5,232 6,034 6,029 6,213 6,554 7,222 Sales and marketing 3,604 3,780 3,849 5,100 3,905 4,212 4,609 5,738 General and administrative 1,403 1,764 1,753 2,003 2,088 2,043 2,591 2,829 European Commission fines 0 5,071 0 0 1,697 0 0 0 Total costs and expenses 23,513 29,612 25,115 31,055 29,731 29,764 31,322 36,809 Income from operations 7,633 3,045 8,625 8,221 6,608 9,180 9,177 9,266 Other income (expense), net 2,910 1,170 1,458 1,851 1,538 2,967 (549 ) 1,438 Income from continuing operations before income taxes 10,543 4,215 10,083 10,072 8,146 12,147 8,628 10,704 Provision for income taxes 1,142 1,020 891 1,124 1,489 2,200 1,560 33 Net income$ 9,401 $ 3,195 $ 9,192 $ 8,948 $ 6,657 $ 9,947 $ 7,068 $ 10,671 Basic net income per share of Class A and B common stock and Class C capital stock$ 13.53 $ 4.60 $ 13.21 $ 12.87 $ 9.58 $ 14.33 $ 10.20 $ 15.49 Diluted net income per share of Class A and B common stock and Class C capital stock$ 13.33 $ 4.54 $ 13.06 $ 12.77
Capital Resources and Liquidity As ofDecember 31, 2019 , we had$119.7 billion in cash, cash equivalents, and 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. As ofDecember 31, 2019 , we had long-term taxes payable of$7.3 billion related to a one-time transition tax payable incurred as a result of the 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. 39
--------------------------------------------------------------------------------
Table of Contents
InNovember 2019 , we entered into an agreement to acquire Fitbit, a leading wearables brand, for$7.35 per share, representing a total purchase price of approximately$2.1 billion as of the date of the agreement. The acquisition of Fitbit is expected to be completed in 2020, subject to customary closing conditions, including the receipt of regulatory approvals. 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. We have a short-term debt financing program of up to$5.0 billion through the issuance of commercial paper. Net proceeds from this program are used for general corporate purposes. We had no commercial paper outstanding as ofDecember 31, 2019 . We have$4.0 billion of revolving credit facilities expiring inJuly 2023 with no amounts outstanding as ofDecember 31, 2019 . The interest rate for the credit facilities is determined based on a formula using certain market rates. We believe that our sources of funding will be sufficient to satisfy our currently anticipated cash requirements including capital expenditures, working capital requirements, potential acquisitions and other liquidity requirements through at least the next 12 months. As ofDecember 31, 2019 , we have senior unsecured notes outstanding due in 2021, 2024, and 2026 with a total carrying value of$4.0 billion . As ofDecember 31, 2019 , we had remaining authorization of$20.8 billion for repurchase of Class C capital stock. 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. Please refer to Note 11 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to share repurchases. We continue to make significant investments in land and buildings for data centers and offices and information technology infrastructure through purchases of property and equipment and lease arrangements to provide capacity for the growth of our business. During the year endedDecember 31, 2019 , we spent$23.5 billion on capital expenditures and recognized total operating lease assets of$4.4 billion . As ofDecember 31, 2019 , the amount of total future lease payments under operating leases, which had a weighted average remaining lease term of 10 years, was$13.9 billion . Finance leases were not material for the year endedDecember 31, 2019 . Please refer to Note 4 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information on the leases. The following table presents our cash flows (in millions): Year EndedDecember 31, 2018 2019
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
--------------------------------------------------------------------------------
Table of Contents
equipment, which primarily includes our investments in land and buildings for data centers and offices and information technology infrastructure to provide capacity for the growth of our businesses; purchases of marketable and non-marketable securities; and payments for acquisitions. Net cash used in investing activities increased from 2018 to 2019 primarily due to a net increase in purchases of securities and an increase in payments for acquisitions, partially offset by a decrease in payments for purchases of property and equipment. The decrease in purchases of property and equipment was driven by decreases in purchases of servers as well as land and buildings for offices, partially offset by an increase in data center construction. Cash Used in Financing Activities Cash provided by financing activities consists primarily of proceeds from issuance of debt and proceeds from sale of interest in consolidated entities. Cash used in financing activities consists primarily of net payments related to stock-based award activities, repurchases of capital stock, and repayments of debt. Net cash used in financing activities increased from 2018 to 2019 primarily due to an increase in cash payments for repurchases of capital stock and a decrease in proceeds from sale of interest in consolidated entities. Contractual Obligations as ofDecember 31, 2019 The following summarizes our contractual obligations as ofDecember 31, 2019 (in millions): Payments Due By Period Less than 1-3 3-5 More than Total 1 year years years 5 years Operating lease obligations(1)$ 13,854 $ 1,757 $ 3,525 $ 2,809 $ 5,763 Obligations for leases that have not yet commenced(1) 7,418 249 850 1,314 5,005 Purchase obligations(2) 5,660 4,212 933 202 313 Long-term debt obligations(3) 5,288 227 1,258 1,224 2,579 Tax payable(4) 7,315 0 1,166 3,661 2,488 Other long-term liabilities reflected on our balance sheet(5) 1,484 245 643 367 229
Total contractual obligations
$ 9,577 $ 16,377 (1) For further information, refer to Note 4 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. (2) Represents non-cancelable contractual obligations primarily related to
information technology assets and data center operation costs; purchases of
inventory; and digital media content licensing arrangements. The amounts
included above represent the non-cancelable portion of agreements or the
minimum cancellation fee. For those agreements with variable terms, we donot estimate the non-cancelable obligation beyond any minimum quantities
and/or pricing as of December 31, 2019 . Excluded from the table above are
open orders for purchases that support normal operations.
(3) Represents our principal and interest payments. For further information on
long-term debt, refer to Note 6 of the Notes to Consolidated Financial
Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
(4) Represents one-time transition tax payable incurred as a result of the Tax
Act. For further information, refer to Note 14 of the Notes to Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report on
Form 10-K. Excluded from the table above are long-term taxes payable of
billion as of
positions, for which 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.
(5) Represents cash obligations recorded on our Consolidated Balance Sheets,
including the short-term portion of these long-term liabilities, primarily
for the construction of offices and certain commercial agreements. These
amounts do not include the EC fines which are classified as current
liabilities on our Consolidated Balance Sheets. For further information
regarding the EC fines, refer to Note 10 of the Notes to Consolidated
Financial Statements included in Part II, Item 8 of this Annual Report on
Form 10-K.
Off-Balance Sheet Arrangements
As of December 31, 2019 , we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of Regulation S-K, 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.
41--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with GAAP. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenues, expenses, gains and losses, 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 Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for a summary of significant accounting policies and the effect on our financial statements. Revenues For the sale of third-party goods and services, we evaluate whether we are the principal, and report revenues on a gross basis, or an agent, and report revenues on a net basis. In this assessment, we consider if we obtain control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price. Income Taxes We are subject to income taxes in theU.S. and 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 affect 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 effect of reserve provisions and changes to reserves that are considered appropriate as well as the related net interest and penalties. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Services (IRS) and other tax 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 Contingencies We are regularly subject to claims, suits, government investigations, and other proceedings involving competition and antitrust, intellectual property, privacy, consumer protection, non-income 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 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 regular 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 the 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 effect on our business, consolidated financial position, results of operations, or cash flows. Long-lived Assets Long-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 42
--------------------------------------------------------------------------------
Table of Contents
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. Fair Value Measurements We measure certain of our non-marketable equity and debt investments, certain other instruments including stock-based compensation awards settled in the stock of certain Other Bets, and certain assets and liabilities acquired in a business combination, at fair value on a nonrecurring basis. The determination of fair value involves the use of appropriate valuation methods and relevant inputs into valuation models. The fair value hierarchy prioritizes the inputs used to measure fair value whereby it gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. We maximize the use of relevant observable inputs and minimize the use of unobservable inputs. Our use of unobservable inputs reflects the assumptions that market participants would use and may include our own data adjusted based on reasonably available information. We apply judgment in assessing the relevance of observable market data to determine the priority of inputs under the fair value hierarchy, particularly in situations where there is very little or no market activity. In determining the fair values of our non-marketable equity and debt investments, as well as assets acquired (especially with respect to intangible assets) and liabilities assumed in business combinations, we make significant estimates and assumptions, some of which include the use of unobservable inputs. Certain stock-based compensation awards may be settled in the stock of certain of our Other Bets or in cash. These awards are based on the equity values of the respective Other Bet, which requires use of unobservable inputs. We also have compensation arrangements with payouts based on realized investment returns, i.e. performance fees. We recognize compensation expense based on the estimated payouts, which may result in expense recognized before investment returns are realized, and may require the use of unobservable inputs.Non-marketable Equity Securities Our non-marketable equity securities not accounted for under the equity method are carried either at fair value or under the measurement alternative. Under the measurement alternative, the carrying value is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Determining whether an observed transaction is similar to a security within our portfolio requires judgment based on the rights and obligations of the securities. Recording upward and downward adjustments to the carrying value of our equity securities as a result of observable price changes requires quantitative assessments of the fair value of our securities using various valuation methodologies and involves the use of estimates. Non-marketable equity securities are also subject to periodic impairment reviews. Our quarterly impairment analysis considers both qualitative and quantitative factors that may have a significant effect on the investment's fair value. Qualitative factors considered include industry and market conditions, financial performance, business prospects, and other relevant events and factors. When indicators of impairment exist, we prepare quantitative assessments of the fair value of our equity investments using both the market and income approaches which require judgment and the use of estimates, including discount rates, investee revenues and costs, and comparable market data of private and public companies, among others. When our assessment indicates that an impairment exists, we measure our non-marketable securities at fair value.
© Edgar Online, source
