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. Executive Overview of Results Below are our key financial results for the three months endedJune 30, 2020 (consolidated unless otherwise noted): •Revenues were$38.3 billion , a decrease of 2% year over year, constant currency revenues were flat year over year. •Google segment revenues were$38.0 billion , a decrease of 2% year over year, and Other Bets revenues were$148 million , a decrease of 9% year over year. •Revenues fromthe United States , EMEA, APAC, and Other Americas were$18.0 billion ,$11.4 billion ,$6.9 billion , and$1.8 billion , respectively. •Cost of revenues was$18.6 billion , consisting of TAC of$6.7 billion and other cost of revenues of$11.9 billion . TAC as a percentage of advertising revenues ("TAC rate") was 22.4%. •Operating expenses (excluding cost of revenues) were$13.4 billion . •Income from operations was$6.4 billion . •Other income (expense), net, was a gain of$1.9 billion . •Effective tax rate was 15.9%. •Net income was$7.0 billion with diluted net income per share of$10.13 . •Operating cash flow was$14.0 billion . •Capital expenditures were$5.4 billion . •Number of employees was 127,498 as ofJune 30, 2020 . The majority of new hires during the quarter were engineers and product managers. By product area, the largest headcount additions were inMarch 11, 2020 was declared a global pandemic by TheWorld Health Organization . Acrossthe United States and the world, governments and municipalities instituted measures in an effort to control the spread of COVID-19, including quarantines, shelter-in-place orders, school closings, travel restrictions and the closure of non-essential businesses. The macroeconomic impacts of COVID-19 are significant and continue to evolve, as exhibited by, among other things, a rise in unemployment, changes in consumer behavior, and market volatility. We began to observe the impact of COVID-19 on our financial results late in the quarter endedMarch 31, 2020 . For the quarter endedJune 30, 2020 , our advertising revenues declined compared to the prior year due to the continued impacts of COVID-19 and the related reductions in global economic activity. During the course of the quarter, we observed a gradual return in user search activity to more commercial topics, followed by increased spending by our advertisers. The decline in advertising revenues was partially offset by continued growth inJune 30, 2020 we recognized net gains on our equity investments as compared to net losses in the quarter endedMarch 30, 2020 . While we continued to make investments in land and buildings for data centers, offices and information technology infrastructure, we have slowed the pace of our investments, primarily as it relates to office facilities. 34 -------------------------------------------------------------------------------- Looking ahead, the impact of COVID-19 on our business continues to evolve and be unpredictable. For example, to the extent the pandemic continues to disrupt economic activity globally we, like other businesses, are not immune to continued adverse impacts to our business, operations and financial results from prolonged decreases in advertising spend, changes in user behavior and preferences, credit deterioration and liquidity of our customers, depressed economic activity, or volatility in capital markets. The extent of the impact will depend on a number of factors, including the duration and severity of the pandemic; the uneven impact to certain industries; advances in testing, treatment and prevention; the macroeconomic impact of government measures to contain the spread of the virus and related government stimulus measures. To address the potential impact to our business, over the near-term, we continue to evaluate the pace of our investment plans, including, but not limited to, our hiring, investments in data centers, servers, network equipment, real estate and facilities, marketing and travel spending, as well as taking certain measures to support our customers, employees, and communities we operate in. The impact of COVID-19 and the extent of these measures we may implement could have a material impact on our financial results. Our past results may not be indicative of our future performance, and historical trends in our financial results may differ materially. Information about Segments We operate our business in multiple operating segments.$ 23,642 $ 21,319 $ 46,189 $ 45,821 YouTube ads(1) 3,603 3,812 6,628 7,850 Google properties 27,245 25,131 52,817 53,671 Google Network Members' properties 5,249 4,736 10,264 9,959 Google advertising 32,494 29,867 63,081 63,630 Google Cloud 2,100 3,007 3,925 5,784 Google other(1) 4,080 5,124 7,700 9,559 Google revenues 38,674 37,998 74,706 78,973 Other Bets revenues 162 148 332 283 Hedging gains (losses) 108 151 245 200 Total revenues$ 38,944 $ 38,297 $ 75,283 $ 79,456 (1) YouTube non-advertising revenues are included in$ 23,642 $ 21,319 $ 46,189 $ 45,821 YouTube ads(1) 3,603 3,812 6,628 7,850 Google Network Members' properties 5,249 4,736 10,264 9,959 Google advertising$ 32,494 $ 29,867 $ 63,081 $ 63,630 who use Google.com as their default search in browsers, toolbars, etc.) and other$2,323 million and$368 million from the three and six months endedJune 30, 2019 to the three and six months endedJune 30, 2020 , respectively, primarily driven by the impact of COVID-19. Beginning in March of 2020, the effects of COVID-19 on both desktop and mobile search led to a decline in revenues when, despite an increase in user search activity, our revenues were adversely affected by a shift to less commercial topics and reduced advertiser spending. During 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. The decrease in revenues from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 was partially offset by the revenue growth we experienced prior to the impact of COVID-19. YouTube ads YouTube ads revenues increased$209 million and$1,222 million from the three and six months endedJune 30, 2019 to the three and six months endedJune 30, 2020 , respectively. The increase was driven by our direct response advertising products, which benefited from improvements to ad formats and delivery and increased advertiser spending. This increase was partially offset by a decline in revenues for our brand advertising products driven by reduced advertiser spending due to the impact of COVID-19. 36 -------------------------------------------------------------------------------- Table of Contents Alphabet Inc.$513 million from the three months endedJune 30, 2019 to the three months endedJune 30, 2020 . The decrease was primarily driven by a decline in revenues for$305 million from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 primarily driven by a decline in revenues forJune 30, 2019 to the three and six months endedJune 30, 2020 due to an increase in paid clicks driven by growth in views of YouTube engagement ads; an increase in clicks due to interrelated factors, including an increase in search queries resulting from ongoing growth in user adoption and usage, primarily on mobile devices; and improvements we have made in ad formats and delivery. This growth was partially offset by the impact of COVID-19, which led to a shift to less commercial search activity and a reduction in advertiser spending. During the three months endedJune 30, 2020 we began to observe a recovery in paid clicks as user search activity gradually returned to more commercial topics, followed by increased spending by our advertisers. The overall positive effect on our revenues from an increase in paid clicks was offset by a decrease in the cost-per-click paid by our advertisers. The decrease in cost-per-click was primarily driven by a mix shift to less commercial topics and reduced advertiser spending in response to COVID-19. In addition, the decrease in cost-per-click was also driven by continued growth in YouTube engagement ads where cost-per-click remains lower than on our other advertising platforms. 37 -------------------------------------------------------------------------------- Table of Contents Alphabet Inc.June 30, 2019 to the three and six months endedJune 30, 2020 primarily due to growth in AdManager. The positive effect on our revenues from an increase in impressions was offset by a decrease in the cost-per-impression paid by our advertisers largely due to a reduction in advertiser spending in response to COVID-19.$ 2,100 $ 3,007 $ 3,925 $ 5,784 $907 million and$1,859 million from the three and six months endedJune 30, 2019 to the three and six months endedJune 30, 2020 , respectively. The growth was primarily driven by our GCP and G Suite offerings. Our infrastructure and our data and analytics platform products have been the largest drivers of growth in GCP.$ 4,080 $ 5,124 $ 7,700 $ 9,559 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. Our$1,044 million and$1,859 million from the three and six months endedJune 30, 2019 to the three and six months endedJune 30, 2020 , respectively. The growth was primarily driven by$ 162
0.4 % 0.4 % 0.4 % 0.4 %
Other Bets revenues consist primarily of revenues from the sale of Access internet 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 (unaudited):
Three Months Ended Six Months Ended
June 30, June 30,
2019 2020 2019 2020
United States 46 % 47 % 46 % 47 %
EMEA 32 % 30 % 32 % 30 %
APAC 17 % 18 % 17 % 18 %
Other Americas 5 % 5 % 5 % 5 %
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.
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 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 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-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 percentage change is calculated by determining the
change in 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.
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The following table presents the foreign exchange effect on our international revenues and total revenues (in millions, except percentages, unaudited):
Three Months Ended Six Months Ended
June 30, June 30,
2019 2020 2019 2020
EMEA revenues $ 12,313 $ 11,363 $ 23,981 $ 24,208
Exclude foreign exchange effect on current period
revenues using prior year rates 816 361 1,578 596
EMEA constant currency revenues $ 13,129 $ 11,724 $ 25,559 $ 24,804
Prior period EMEA revenues $ 10,888 $ 12,313 $ 21,579 $ 23,981
EMEA revenue percentage change 13 % (8) % 11 % 1 %
EMEA constant currency revenue percentage change 21 % (5) % 18 % 3 %
APAC revenues $ 6,536 $ 6,945 $ 12,632 $ 14,183
Exclude foreign exchange effect on current period
revenues using prior year rates 217 105 416 166
APAC constant currency revenues $ 6,753 $ 7,050 $ 13,048 $ 14,349
Prior period APAC revenues $ 5,090 $ 6,536 $ 9,909 $ 12,632
APAC revenue percentage change 28 % 6 % 27 % 12 %
APAC constant currency revenue percentage change 33 % 8 % 32 % 14 %
Other Americas revenues $ 2,124 $ 1,839 $ 4,030 $ 3,996
Exclude foreign exchange effect on current period
revenues using prior year rates 184 240 376 336
Other
$ 1,849 $ 2,124 $ 3,580 $ 4,030 Other Americas revenue percentage change 15 % (13) % 13 % (1) % OtherAmericas constant currency revenue percentage change 25 % (2) % 23 % 7 % United States revenues$ 17,863 $ 17,999 $ 34,395 $ 36,869 United States revenue percentage change 20 % 1 % 18 % 7 % Hedging gains$ 108 $ 151 $ 245 $ 200 Total revenues$ 38,944 $ 38,297 $ 75,283 $ 79,456 Total constant currency revenues$ 40,053 $ 38,852 $ 77,408 $ 80,354 Prior period revenues, excluding hedging effect(1)$ 32,760 $ 38,836 $ 64,145 $ 75,038 Total revenue percentage change 19 % (2) % 18 % 6 % Total constant currency revenue percentage change 22 % 0 % 21 % 7 % (1) Total revenues and hedging (losses) were$32,657 million and$(103) million for the three months endedJune 30, 2018 , respectively, and$63,803 million and$(342) million for the six months endedJune 30, 2018 , respectively. Our EMEA revenue percentage change from the three and six months endedJune 30, 2019 to the three and six months endedJune 30, 2020 was unfavorably affected by foreign currency exchange rates primarily due to theU.S. dollar strengthening relative to the Euro and British pound. Our APAC revenue percentage change from the three and six months endedJune 30, 2019 to the three and six months endedJune 30, 2020 was unfavorably affected by foreign currency exchange rates primarily due to theU.S. dollar strengthening relative to Australian dollar and South Korean won, partially offset by theU.S. dollar weakening relative to the Japanese yen. 40 -------------------------------------------------------------------------------- Table of Contents Alphabet Inc. Our Other Americas revenue percentage change from the three months endedJune 30, 2019 to the three months endedJune 30, 2020 was unfavorably affected by changes in foreign currency exchange rates, primarily due to theU.S. dollar strengthening relative to the Brazilian real. Our Other Americas revenue percentage change from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 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. Costs and Expenses Cost of Revenues Cost of revenues consists of TAC which are paid towho make available our search access points and services. Our distribution partners include browser providers, mobile carriers, original equipment manufacturers, and software developers. The cost of revenues as a percentage of revenues generated from ads placed on$ 7,238 $ 6,694 $ 14,098 $ 14,146 Other cost of revenues 10,058 11,859 19,210 23,389 Total cost of revenues$ 17,296 $ 18,553 $ 33,308 $ 37,535 Total cost of revenues as a percentage of revenues 44.4 % 48.4 % 44.2 % 47.2 % Cost of revenues increased$1,257 million from the three months endedJune 30, 2019 to the three months endedJune 30, 2020 . The increase was due to an increase in other cost of revenues$1,801 million which was partially offset by a decrease in TAC of$544 million . Cost of revenues increased$4,227 million from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 . The increase was due to increases in other cost of revenues of$4,179 million and TAC of$48 million , respectively. The increase in other cost of revenues from the three and six months endedJune 30, 2019 to the three and six months endedJune 30, 2020 was due to an increase in data center and other operations costs and an increase in content acquisition costs primarily for YouTube consistent with the growth in YouTube revenues. This increase was partially offset by a decline in hardware costs. TAC decreased from the three months endedJune 30, 2019 to the three months endedJune 30, 2020 due to decreases in TAC paid toJune 30, 2019 to the three months endedJune 30, 2020 primarily due to an increase in the TAC rate onJune 30, 2019 to the three months endedJune 30, 2020 . 41 -------------------------------------------------------------------------------- Table of Contents Alphabet Inc. TAC increased from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 due to an increase in TAC paid to distribution partners which was partially offset by a decrease in TAC paid toJune 30, 2019 to the six months endedJune 30, 2020 primarily due to the favorable revenue mix shift fromJune 30, 2019 to the six months endedJune 30, 2020 . Over time, cost of revenues as a percentage of total revenues may be affected by a number of factors, including the following: •The amount of TAC paid to Google Network Members, which is affected by a combination of factors such as geographic mix, product mix, revenue share terms, and fluctuations of theU.S. dollar compared to certain foreign currencies; •The amount of TAC paid to distribution partners, which is affected by changes in device mix, geographic mix, partner mix, partner agreement terms such as revenue share arrangements, and the percentage of queries channeled through paid access points; •Relative revenue growth rates of$ 6,213 $ 6,875 $ 12,242 $ 13,695 Research and development expenses as a percentage of revenues 16.0 % 18.0 % 16.3 % 17.2 % 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$662 million from the three months endedJune 30, 2019 to the three months endedJune 30, 2020 . The increase was primarily due to an increase in compensation expenses (including SBC) and facilities-related costs of$689 million , largely resulting from a 12% increase in headcount. R&D expenses increased$1,453 million from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 . The increase was primarily due to an increase in compensation expenses (including SBC) and facilities-related costs of$1,376 million , largely resulting from a 15% increase in headcount. Over time, R&D expenses as a percentage of revenues may fluctuate due to certain expenses that are generally less variable in nature and may not correlate to the changes in revenues. In addition, R&D expenses may be affected by a number of factors including continued investment in ads, Android, Chrome, Google Cloud, Google Play, hardware, machine learning, Other Bets, Search and YouTube. 42 -------------------------------------------------------------------------------- Table of Contents Alphabet Inc. Sales and Marketing The following table presents our sales and marketing expenses (in millions, unaudited): Three Months Ended Six Months Ended June 30, June 30, 2019 2020 2019 2020 Sales and marketing expenses$ 4,212 $ 3,901 $ 8,117 $ 8,401 Sales and marketing expenses as a percentage of revenues 10.8 % 10.2 % 10.8 % 10.6 % 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 decreased$311 million from the three months endedJune 30, 2019 to the three months endedJune 30, 2020 . The decrease was primarily due to a decrease in advertising and promotional expenses of$536 million as we paused or rescheduled campaigns and changed some events to digital-only formats as a result of COVID-19. This decrease was partially offset by an increase in compensation expenses (including SBC) and facilities-related costs of$349 million , largely resulting from a 7% increase in headcount. Sales and marketing expenses increased$284 million from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 . The increase was primarily due to an increase in compensation expenses (including SBC) and facilities-related costs of$733 million , largely resulting from a 8% increase in headcount. The increase was partially offset by a decrease in advertising and promotional expenses of$419 million as we paused or rescheduled campaigns and changed some events to digital-only formats as a result of COVID-19. Over time, sales and marketing expenses as a percentage of revenues may fluctuate due to certain expenses that are generally less variable in nature and may not correlate to the changes in revenues. In addition, sales and marketing expenses may be affected by a number of factors including the seasonality associated with new product and service launches and strategic decisions regarding the timing and extent of our spending. General and Administrative The following table presents our general and administrative expenses (in millions, unaudited): Three Months Ended Six Months Ended June 30, June 30, 2019 2020 2019 2020 General and administrative expenses$ 2,043 $
2,585
5.2 % 6.7 % 5.5 % 6.9 %
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;
•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 $542 million from the three months
ended June 30, 2019 to the three months ended June 30, 2020 . The increase was
primarily due to an increase in compensation expenses (including SBC) and
facilities-related costs of $197 million , largely resulting from a 17% increase
in headcount. In addition, there was an increase of $124 million in charitable
contributions primarily related to our response to COVID-19 and an increase of
$91 million related to allowance for credit losses for accounts receivable.
General and administrative expenses increased $1,334 million from the six months
ended June 30, 2019 to the six months ended June 30, 2020 . $538 million of the
increase was due to an increase in compensation expenses (including SBC) and
facilities-related costs, largely resulting from a 17% increase in headcount. In
addition, $504
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million of the increase related to allowance for credit losses for accounts
receivable primarily due to the 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 further allowances for credit losses for accounts
receivable associated with the impact of COVID-19.
European Commission Fines
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 1, Item 1 of this Quarterly Report on Form 10-Q for further
information.
Other Income (Expense), Net
The following table presents other income (expense), net (in millions,
unaudited):
Three Months Ended Six Months Ended
June 30, June 30,
2019 2020 2019 2020
Other income (expense), net $ 2,967 $ 1,894 $ 4,505 $ 1,674
Other income (expense), net, decreased $1,073 million from the three months
ended June 30, 2019 to the three months ended June 30, 2020 . The change was
primarily driven by decreases in unrealized gains on equity securities,
partially offset by a decrease in accrued performance fees.
Other income (expense), net, decreased $2,831 million from the six months ended
June 30, 2019 to the six months ended June 30, 2020 . The change was primarily
driven by decreases in unrealized gains, including impairments, on equity
securities, partially offset by a decrease in accrued performance fees.
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. In addition, volatility in the
global economic climate and financial markets, including the effects of
COVID-19, 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; unaudited):
Three Months Ended Six Months Ended
June 30, June 30,
2019 2020 2019 2020
Provision for income taxes $ 2,200 $ 1,318 $ 3,689 $ 2,239
Effective tax rate 18.1 % 15.9 % 18.2 % 14.0 %
Our effective tax rate decreased 2.2% from the three months ended June 30, 2019
to the three months ended June 30, 2020 . The decrease in effective tax rate is
primarily due to an increase in stock-based compensation related tax benefits
including the reversal of the Altera tax benefit as a result of the U.S. Court
of Appeals decision in 2019 that did not recur in 2020, and an increase in the
U.S. federal Foreign-Derived Intangible Income tax benefit, partially offset by
an increase in valuation allowance for our net deferred tax assets that are not
likely to be realized relating to certain of our Other Bets.
Our effective tax rate decreased 4.2% from the six months ended June 30, 2019 to
the six months ended June 30, 2020 . The decrease in effective tax rate is
primarily due to an increase in the U.S. federal Foreign-Derived Intangible
Income tax benefit and stock-based compensation related tax benefits including
the reversal of the Altera tax benefit as a result of the U.S. Court of Appeals
decision in 2019 that did not recur in 2020, partially offset by an
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increase in valuation allowance for our net deferred tax assets that are not
likely to be realized relating to certain of our Other Bets.
Our effective tax rate is based on forecasted annual results which may fluctuate
through the rest of the year, in particular due to COVID-19. As such, evolving
facts and circumstances surrounding these forecasts could result in the
application of different provisions of tax laws and cause our estimated annual
effective tax rate to change significantly through the remainder of the year.
In addition, our future effective tax rate may be affected by changes in the
geographic mix of earnings in countries with different statutory rates, the
valuation of our deferred tax assets or liabilities, or changes in tax laws,
regulations, or accounting principles, as well as certain discrete items.
Capital Resources and Liquidity
As of June 30, 2020 , we had $121.1 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 of June 30, 2020 , we had long-term taxes payable of $6.5 billion related to a
one-time transition tax payable incurred as a result of the U.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
Google infringed European competition law and imposed fines of €2.4 billion
($2.7 billion as of June 27, 2017 ), €4.3 billion ($5.1 billion as of June 30,
2018 ), and €1.5 billion ($1.7 billion as of March 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.
In November 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 later this year, subject to customary closing
conditions, including the receipt of regulatory approvals.
In July 2020 , we announced the Google for India Digitization Fund to help
accelerate India's digital economy. In addition, we announced our first
transaction of the fund in which we entered into an agreement to invest
approximately INR 33,737 crore ($4.5 billion as of July 15, 2020 ) in Jio
Platforms Ltd. for a 7.7% stake in the company. This agreement is subject to
regulatory review in India and is expected to be completed later this year.
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. As of June 30, 2020 , we had no commercial paper
outstanding. As of June 30, 2020 , we have $4.0 billion of revolving credit
facilities expiring in July 2023 with no amounts outstanding. 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 of June 30, 2020 , we have senior unsecured notes outstanding due in 2021,
2024, and 2026 with a total carrying value of $4.0 billion .
In July 2019 the Board of Directors of Alphabet authorized the company to
repurchase up to $25.0 billion of its Class C capital stock. As of June 30,
2020 , $5.4 billion remains available for repurchase. In July 2020 , the Board of
Directors of Alphabet authorized the company to repurchase up to an additional
$28.0 billion of its 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. Refer to Note 11 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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During the six months ended June 30, 2020 we spent $11.4 billion on capital
expenditures and recognized total operating lease assets of $1.4 billion . As of
June 30, 2020 , the amount of total future lease payments under operating leases,
which had a weighted average remaining lease term of 9 years, was $14.4 billion .
Finance leases were not material for the six months ended June 30, 2020 . Refer
to Note 4 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
leases.
The following table presents our cash flows (in millions, unaudited):
Six Months Ended
June 30,
2019 2020
Net cash provided by operating activities
Cash Provided by Operating Activities Our largest source of cash provided by our operations are advertising revenues generated byJune 30, 2019 to the six months endedJune 30, 2020 primarily due to the net impact of increases in cash received from revenues and cash paid for cost of revenues and operating expenses and the timing of income tax payments, partially offset by an increase in cash paid for compensation expenses accrued as ofDecember 31, 2019 . 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 property and equipment, which primarily includes our investments in land and buildings for data centers, 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 decreased from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 primarily due to a net increase in maturities and sales of marketable securities, partially offset by an increase in purchases of marketable securities. 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 net payments related to stock-based award activities, repurchases of capital stock, and repayments of debt. Net cash used in financing activities increased from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 primarily due to an increase in cash payments for repurchases of capital stock, partially offset by an increase in proceeds from the sale of interest in consolidated entities. 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, 2019 . 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, 2019 , certain of which are further described below. As ofJune 30, 2020 the impact of COVID-19 continues to unfold and as a result, certain of our estimates and assumptions require increased judgment and carry a higher degree of variability and volatility that could result in material changes to our estimates in future periods. 46
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Table of Contents Alphabet Inc.
Income Taxes
We are subject to income taxes in the U.S. and foreign jurisdictions.
Significant judgment is required in evaluating our uncertain tax positions and
determining our provision for income taxes. Our interim tax accruals are based
on an estimated annual effective tax rate applied to year-to-date income along
with certain discrete items recorded in the period. Estimates of the annual
effective tax rate at the end of an interim period are based on our best
estimate of future events and transactions which, as a result of COVID-19, may
be impacted by a higher degree of variability and volatility. As such, evolving
facts and circumstances surrounding these forecasts could result in the
application of different provisions of tax laws and cause our estimated annual
effective tax rate to change significantly through the remainder of the year.
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 Service ("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.
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 the SEC . We also provide a link
to the section of the SEC's website at www.sec.gov that has all of the reports
that we file or furnish with the SEC .
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, including SEC 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 the SEC , and any references to our websites are intended to be
inactive textual references only.
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