Press release

Alphabet Announces Third Quarter 2016 Results

MOUNTAIN VIEW, Calif. – October 27, 2016 – Alphabet Inc. (NASDAQ: GOOG, GOOGL) today announced financial results for the quarter ended September 30, 2016.

“We had a great third quarter, with 20% revenue growth year on year, and 23% on a constant currency basis. Mobile search and video are powering our core advertising business and we’re excited about the progress of newer businesses in Google and Other Bets,” said Ruth Porat, CFO of Alphabet.

Q3 2016 financial highlights

The following summarizes our consolidated financial results for the quarters ended September 30, 2015 and 2016 (in millions, except for per share information; unaudited):

Three Months Ended
September 30, 2015
Three Months Ended
September 30, 2016
Revenues $18,675 $22,451
Increase in revenues year over year 13 % 20 %
Increase in constant currency revenues year over year 21 % 23 %
GAAP operating income $4,708 $5,767
GAAP operating margin 25 % 26 %
Non-GAAP operating income $6,140 $7,627
Non-GAAP operating margin 33 % 34 %
GAAP net income $3,979 $5,061
Non-GAAP net income $5,102 $6,326
GAAP diluted EPS for Class A and B common stock and Class C capital stock $5.73 $7.25
Non-GAAP diluted EPS for Class A and B common stock and Class C capital stock $7.35 $9.06
Diluted shares (in thousands) 694,319 698,440

Operating income, operating margin, net income, and diluted 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, 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
September 30, 2015
Three Months Ended
September 30, 2016
Google segment revenues $18,534 $22,254
Google operating income $5,807 $6,778
Other Bets revenues $141 $197
Other Bets operating loss $(980) $(865)

Q3 2016 consolidated financial summary

Revenues (in millions; unaudited):

Three Months Ended
September 30, 2016
Change from Q3 2015 to Q3 2016 (YoY) Change from Q2 2016 to Q3 2016 (QoQ)
Revenues $22,451 20% 4%
Constant currency revenues (YoY) $22,542 23% N/A
Constant currency revenues (QoQ) $22,458 N/A 5%

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
September 30, 2015
Three Months Ended
September 30, 2016
Cost of revenues $7,037 $8,699
Cost of revenues as % of revenues 38 % 39 %
Operating expenses (other than cost of revenues) $6,930 $7,985
Operating expenses as % of revenues 37 % 36 %
SBC expense* $1,432 $1,860
SBC related tax benefits $(309) $(595)
Depreciation, amortization, and impairment charges $1,248 $1,596
*Excludes the expense for awards accounted for as stock-based compensation that we expect to ultimately settle in cash.

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

Three Months Ended
September 30, 2015
Three Months Ended
September 30, 2016
Cash, cash equivalents, and marketable securities $72,767 $83,056
Net cash provided by operating activities $6,145 $9,845
Capital expenditures $2,383 $2,554
Free cash flow $3,762 $7,291
Effective tax rate (ETR) 19 % 16 %
Headcount 59,976 69,953

Our free cash flow is reconciled in the financial tables following this release.

Q3 2016 Google segment summary

Revenues and monetization

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

Three Months Ended
September 30, 2015
Three Months Ended
September 30, 2016
Change from Q3 2015 to Q3 2016 (YoY)
          Google websites $13,087 $16,089 23%
          Google Network Members' websites 3,694 3,732 1%
     Google advertising revenues 16,781 19,821 18%
     Google other revenues 1,753 2,433 39%
Google segment revenues $18,534 $22,254 20%

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

Change from Q3 2015 to Q3 2016 (YoY) Change from Q2 2016 to Q3 2016 (QoQ)
Aggregate paid clicks 33% 9%
Paid clicks on Google websites 42% 11%
Paid clicks on Google Network Members' websites 1% 1%
Aggregate cost-per-click -11% -5%
Cost-per-click on Google websites -13% -6%
Cost-per-click on Google Network Members' websites -14% -6%

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
September 30, 2015
Three Months Ended
September 30, 2016
TAC to Google Network Members $2,514 $2,623
TAC to Google Network Members as % of Google Network Members' revenues 68 % 70 %
TAC to distribution partners $1,052 $1,559
TAC to distribution partners as % of Google website revenues 8 % 10 %
Total TAC $3,566 $4,182
Total TAC as % of Google advertising revenues 21 % 21 %
Three Months Ended September 30, 2015 Three Months Ended September 30, 2016
Operating income $5,807 $6,778
SBC expense $1,275 $1,628
Operating income, excluding SBC expense $7,082 $8,406

Supplemental information (in millions; unaudited)

Three Months Ended
September 30, 2015
Three Months Ended
September 30, 2016
Capital expenditures $2,340 $2,434
Depreciation, amortization, and impairment $1,200 $1,488

Q3 2016 Other Bets summary

Revenues and operating results

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

Three Months Ended
September 30, 2015
Three Months Ended
September 30, 2016
Other Bets revenues $141 $197
Operating loss $(980) $(865)
SBC expense $128 $200
Operating loss, excluding SBC expense $(852) $(665)

Supplemental information (in millions; unaudited)

Three Months Ended
September 30, 2015
Three Months Ended
September 30, 2016
Capital expenditures $271 $324
Depreciation, amortization, and impairment $48 $104

Stock Repurchase

In October 2016, the board of directors of Alphabet authorized the company to repurchase up to $7,019,340,976.83 of its Class C capital stock. The repurchase is expected to be 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.

Webcast and conference call information

A live audio webcast of our third 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, as updated by the Form 8-K filed on May 3, 2016, and our most recent Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, which are on file with the SEC and are 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 September 30, 2016. All information provided in this release and in the attachments is as of October 27, 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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Q3 financial data
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