Press release

Alphabet Announces First Quarter 2016 Results

MOUNTAIN VIEW, Calif. – April 21, 2016 – Alphabet Inc. (NASDAQ: GOOG, GOOGL) today announced financial results for the quarter ended March 31, 2016.

“Our Q1 results represent a tremendous start to the year with 17% revenue growth year on year and 23% growth on a constant currency basis. We’re thoughtfully pursuing big bets and building exciting new technologies, in Google and our Other Bets, that position us well for long term growth,” said Ruth Porat, CFO of Alphabet.

Q1 2016 financial highlights

The following summarizes our consolidated financial results for the quarters ended March 31, 2015 and 2016 (in millions, except for per share information; unaudited):

Three Months Ended
March 31, 2015
Three Months Ended
March 31, 2016
Revenues $17,258 $20,257
Increase in revenues year over year 12 % 17 %
Increase in constant currency revenues year over year 17 % 23 %
GAAP operating income $4,447 $5,342
GAAP operating margin 26 % 26 %
Non-GAAP operating income $5,650 $6,836
Non-GAAP operating margin 33 % 34 %
GAAP net income $3,515 $4,207
Non-GAAP net income $4,461 $5,248
GAAP diluted EPS for Class A and B common stock and Class C capital stock $5.10 $6.02
Non-GAAP diluted EPS for Class A and B common stock and Class C capital stock $6.47 $7.50
Diluted shares (in thousands) 689,498 699,311

Operating income, operating margin, net income, and earnings per share (EPS) are reported on a GAAP and non-GAAP basis. Non-GAAP operating income and non-GAAP operating margin exclude stock-based compensation (SBC) expense. Non-GAAP net income and non-GAAP diluted EPS exclude SBC expense, net of the SBC related tax benefits. These non-GAAP measures, as well as free cash flow, an alternative non-GAAP measure of liquidity, and non-GAAP constant currency revenues and growth, are described and reconciled to the corresponding GAAP measures at the end of this release.

The following summarizes our segment results where Google is presented as a single segment and all other Alphabet businesses are combined as Other Bets (in millions; unaudited):

Three Months Ended
March 31, 2015
Three Months Ended
March 31, 2016
Google segment revenues $17,178 $20,091
Google operating income $5,188 $6,272
Other Bets revenues $80 $166
Other Bets operating loss ($633) ($802)

Q1 2016 consolidated financial summary

Revenues (in millions; unaudited):

Three Months Ended
March 31, 2016
Change from Q1 2015 to Q1 2016 (YoY) Change from Q4 2015 to Q1 2016 (QoQ)
Revenues $20,257 17% (5)%
Constant currency revenues (YoY) $20,850 23% N/A
Constant currency revenues (QoQ) $20,238 N/A (4)%

Our revenues and constant currency revenues are reconciled in the financial tables following this release.

Costs and expenses

Cost of revenues, operating expenses, SBC expense, and depreciation, amortization, and impairment charges (in millions; unaudited):

Three Months Ended
March 31, 2015
Three Months Ended
March 31, 2016
Cost of revenues $6,356 $7,648
Cost of revenues as % of revenues 37 % 38 %
Operating expenses (other than cost of revenues) $6,455 $7,267
Operating expenses as % of revenues 37 % 36 %
SBC expense* $1,203 $1,494
SBC related tax benefits $(257) $(453)
Depreciation, amortization, and impairment charges $1,177 $1,371
*Excludes the expense for awards accounted for as stock-based compensation that will ultimately settle in cash.

Supplemental information (in millions, except for headcount data; unaudited)

Three Months Ended
March 31, 2015
Three Months Ended
March 31, 2016
Cash, cash equivalents, and marketable securities $65,436 $75,264
Net cash provided by operating activities* $6,722 $7,658
Capital expenditures $2,927 $2,428
Free cash flow* $3,795 $5,230
Effective tax rate (ETR)* 24 % 18 %
Headcount 55,419 64,115
*In Q1 2016, we adopted Accounting Standards Update No. 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which addresses, among other items, updates to the presentation and treatment of certain tax benefits related to SBC. Prior period balances related to the consolidated statements of cash flows as well as free cash flow have been adjusted accordingly for comparative purposes. The impact from the changes in the treatment of such tax benefits in Q1 2016 resulted in a favorable ETR impact of 4%.

Q1 2016 Google segment summary

Revenues and monetization

Google segment revenues by source (in millions; unaudited):

Three Months Ended
March 31, 2015
Three Months Ended
March 31, 2016
Change from Q1 2015 to Q1 2016 (YoY)
Google segment
          Google websites $11,932 $14,328 20%
          Google Network Members' websites 3,576 3,692 3%
     Google advertising revenues 15,508 18,020 16%
     Google other revenues 1,670 2,071 24%
Google segment revenues $17,178 $20,091 17%

Paid clicks and cost-per-click information (unaudited):

Change from Q1 2015 to Q1 2016 (YoY) Change from Q4 2015 to Q1 2016 (QoQ)
Aggregate paid clicks 29 % (3)%
Paid clicks on Google websites 38 % (4)%
Paid clicks on Google Network Members' websites 2 % 4 %
Aggregate cost-per-click (9)% 0 %
Cost-per-click on Google websites (12)% 2 %
Cost-per-click on Google Network Members' websites (8)% (12)%

Traffic acquisition costs (TAC) and operating income

TAC to Google Network Members and distribution partners, operating income, and SBC expense (in millions; unaudited):

Three Months Ended
March 31, 2015
Three Months Ended
March 31, 2016
TAC to Google Network Members $2,432 $2,571
TAC to Google Network Members as % of Google Network Members' revenues 68 % 70 %
TAC to distribution partners $913 $1,217
TAC to distribution partners as % of Google website revenues 8 % 8 %
Total TAC $3,345 $3,788
Total TAC as % of Google advertising revenues 22 % 21 %
Three Months Ended March 31, 2015 Three Months Ended March 31, 2016
Operating income, excluding SBC expense $6,243 $7,588
SBC expense $1,055 $1,316
Operating income $5,188 $6,272

Supplemental information (in millions; unaudited)

Three Months Ended
March 31, 2015
Three Months Ended
March 31, 2016
Capital expenditures $2,678 $2,036
Depreciation, amortization, and impairment $1,137 $1,317

Q1 2016 Other Bets summary

Revenues and operating results

Other Bets revenues, operating loss, and SBC expense (in millions; unaudited):

Three Months Ended
March 31, 2015
Three Months Ended
March 31, 2016
Other Bets revenues $80 $166
Operating loss, excluding SBC expense $(516) $(657)
SBC expense $117 $145
Operating loss $(633) $(802)

Supplemental information (in millions; unaudited)

Three Months Ended
March 31, 2015
Three Months Ended
March 31, 2016
Capital expenditures $157 $280
Depreciation, amortization, and impairment $40 $54

Stock repurchase

In Q1 2016, we repurchased 3.2 million shares of Alphabet Class C capital stock for an aggregate amount of $2.3 billion, of which $2.1 billion was paid during the quarter. The total remaining authorization for future repurchases is approximately $1.4 billion. The authorization has no expiration date.

Adoption of new accounting guidance

In Q1 2016, we early adopted Accounting Standards Update No. 2016-09 "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," which changes several aspects of the accounting for share-based payments, including income tax consequences and classification on the consolidated statement of cash flows. Starting this quarter, certain tax benefits are reflected in our consolidated statement of income, whereas they were previously recognized in equity. Additionally, our consolidated statements of cash flows now present such tax benefits as an operating activity and the prior period is adjusted accordingly.

Webcast and conference call information

A live audio webcast of our first quarter 2016 earnings release call will be available at https://abc.xyz/investor. The call begins today at 1:30 PM (PT) / 4:30 PM (ET). This press release, including the reconciliations of certain non-GAAP measures to their nearest comparable GAAP measures, is also available on that site.

We also announce investor information, including news and commentary about our business and financial performance, SEC filings, notices of investor events and our press and earnings releases, on our investor relations website.

Forward-looking statements

This press release may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from the results predicted, and reported results should not be considered as an indication of future performance. The potential risks and uncertainties that could cause actual results to differ from the results predicted include, among others, those risks and uncertainties included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2015, which is on file with the SEC and is available on our investor relations website at https://abc.xyz/investor and on the SEC website at www.sec.gov. Additional information will also be set forth in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016. All information provided in this release and in the attachments is as of April 21, 2016, and we undertake no duty to update this information unless required by law.

About non-GAAP financial measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use the following non-GAAP financial measures: non-GAAP operating income, non-GAAP operating margin, non-GAAP net income, non-GAAP diluted EPS, free cash flow, non-GAAP constant currency revenues, and non-GAAP constant currency revenue growth. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

We use these non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Our management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance and liquidity by excluding certain items that may not be indicative of our recurring core business operating results, such as our revenues excluding the impact for foreign currency fluctuations or our operating performance excluding not only non-cash charges, such as SBC expense, but also discrete cash charges that are infrequent in nature. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, and analyzing future periods. These non-GAAP financial measures also facilitate management's internal comparisons to our historical performance and liquidity as well as comparisons to our competitors' operating results. We believe these non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business.

For more information on these non-GAAP financial measures, please see the tables captioned "Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures," "Reconciliation from net cash provided by operating activities to free cash flow," and "Reconciliation from GAAP revenues to non-GAAP constant currency revenues" included at the end of this release.

Contact

Investor Relations:
investor-relations@abc.xyz

Media:
press@abc.xyz

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Q1 financial data
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