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Alphabet Inc. 10-Q Apr. 27, 2021 7:17 PM

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ITEM 1.FINANCIAL STATEMENTS



Alphabet Inc.


CONSOLIDATED BALANCE SHEETS


(in millions, except share amounts which are reflected in thousands, and par value per share amounts)

















































As of

December 31, 2020

As of

March 31, 2021

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

26,465 

$

26,622 

Marketable securities

110,229 

108,482 

Total cash, cash equivalents, and marketable securities

136,694 

135,104 

Accounts receivable, net

30,930 

28,006 

Income taxes receivable, net

454 

493 

Inventory

728 

888 

Other current assets

5,490 

7,646 

Total current assets

174,296 

172,137 

Non-marketable investments

20,703 

25,294 

Deferred income taxes

1,084 

1,129 

Property and equipment, net

84,749 

87,606 

Operating lease assets

12,211 

12,598 

Intangible assets, net

1,445 

1,823 

Goodwill

21,175 

22,341 

Other non-current assets

3,953 

4,167 

Total assets

$

319,616 

$

327,095 

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$

5,589 

$

4,801 

Accrued compensation and benefits

11,086 

8,375 

Accrued expenses and other current liabilities

28,631 

30,732 

Accrued revenue share

7,500 

6,962 

Deferred revenue

2,543 

2,690 

Income taxes payable, net

1,485 

1,893 

Total current liabilities

56,834 

55,453 

Long-term debt

13,932 

13,887 

Deferred revenue, non-current

481 

530 

Income taxes payable, non-current

8,849 

9,278 

Deferred income taxes

3,561 

4,406 

Operating lease liabilities

11,146 

11,382 

Other long-term liabilities

2,269 

2,146 

Total liabilities

97,072 

97,082 

Contingencies (Note 9)

Stockholders’ equity:


Convertible preferred stock, $0.001 par value per share, 100,000 shares authorized; no shares issued and outstanding




Class A and Class B common stock, and Class C capital stock and additional paid-in capital, $0.001 par value per share: 15,000,000 shares authorized (Class A 9,000,000, Class B 3,000,000, Class C 3,000,000); 675,222 (Class A 300,730, Class B 45,843, Class C 328,649) and 671,094 (Class A 300,747, Class B 45,836, Class C 324,511) shares issued and outstanding


58,510 

59,436 

Accumulated other comprehensive income (loss)

633 

(3)

Retained earnings

163,401 

170,580 

Total stockholders’ equity

222,544 

230,013 

Total liabilities and stockholders’ equity

$

319,616 

$

327,095 


See accompanying notes.









Alphabet Inc.


CONSOLIDATED STATEMENTS OF INCOME


(in millions, except per share amounts; unaudited)


































Three Months Ended

March 31,

2020

2021

Revenues

$

41,159 

$

55,314 

Costs and expenses:

Cost of revenues

18,982 

24,103 

Research and development

6,820 

7,485 

Sales and marketing

4,500 

4,516 

General and administrative

2,880 

2,773 

Total costs and expenses

33,182 

38,877 

Income from operations

7,977 

16,437 

Other income (expense), net

(220)

4,846 

Income before income taxes

7,757 

21,283 

Provision for income taxes

921 

3,353 

Net income

$

6,836 

$

17,930 

Basic net income per share of Class A and B common stock and Class C capital stock

$

9.96 

$

26.63 

Diluted net income per share of Class A and B common stock and Class C capital stock

$

9.87 

$

26.29 



See accompanying notes.









Alphabet Inc.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(in millions; unaudited)




















Three Months Ended

 

March 31,

 

2020

2021

Net income

$

6,836 

$

17,930 

Other comprehensive income (loss):

Change in foreign currency translation adjustment

(550)

(423)

Available-for-sale investments:

Change in net unrealized gains (losses)

498 

(488)

Less: reclassification adjustment for net (gains) losses included in net income

(169)

11 


Net change, net of income tax benefit (expense) of $(81) and $135


329 

(477)

Cash flow hedges:

Change in net unrealized gains (losses)

378 

179 

Less: reclassification adjustment for net (gains) losses included in net income

(22)

85 


Net change, net of income tax benefit (expense) of $(81) and $(50)


356 

264 

Other comprehensive income (loss)

135 

(636)

Comprehensive income

$

6,971 

$

17,294 



See accompanying notes.









Alphabet Inc.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


(In millions, except share amounts which are reflected in thousands; unaudited)
















 

Three Months Ended March 31, 2020

 

Class A and Class B

Common Stock, Class C Capital Stock and

Additional Paid-In Capital

Accumulated

Other

Comprehensive

Income (Loss)

Retained

Earnings

Total

Stockholders’

Equity

 

Shares    

Amount    

Balance as of December 31, 2019

688,335 

$

50,552 

$

(1,232)

$

152,122 

$

201,442 

Common and capital stock issued

2,125 

106 



106 

Stock-based compensation expense


3,222 



3,222 

Tax withholding related to vesting of restricted stock units and other


(1,179)



(1,179)

Repurchases of capital stock

(6,488)

(606)


(7,890)

(8,496)

Sale of interest in consolidated entities


1,593 



1,593 

Net income




6,836 

6,836 

Other comprehensive income (loss)



135 


135 

Balance as of March 31, 2020

683,972 

$

53,688 

$

(1,097)

$

151,068 

$

203,659 

















 

Three Months Ended March 31, 2021

 

Class A and Class B

Common Stock, Class C Capital Stock and

Additional Paid-In Capital

Accumulated

Other

Comprehensive

Income (Loss)

Retained

Earnings

Total

Stockholders’

Equity

 

Shares    

Amount    

Balance as of December 31, 2020

675,222 

$

58,510 

$

633 

$

163,401 

$

222,544 

Common and capital stock issued

1,569 





Stock-based compensation expense


3,788 



3,788 

Tax withholding related to vesting of restricted stock units and other


(2,234)



(2,234)

Repurchases of capital stock

(5,697)

(644)


(10,751)

(11,395)

Sale of interest in consolidated entities


10 



10 

Net income




17,930 

17,930 

Other comprehensive income (loss)



(636)


(636)

Balance as of March 31, 2021

671,094 

$

59,436 

$

(3)

$

170,580 

$

230,013 



See accompanying notes.












Alphabet Inc.


CONSOLIDATED STATEMENTS OF CASH FLOWS


(in millions; unaudited)





















































Three Months Ended

March 31,

2020

2021

Operating activities

Net income

$

6,836 

$

17,930 

Adjustments:

Depreciation and impairment of property and equipment

2,899 

2,525 

Amortization and impairment of intangible assets

209 

228 

Stock-based compensation expense

3,191 

3,745 

Deferred income taxes

175 

1,100 

(Gain) loss on debt and equity securities, net

802 

(4,751)

Other

297 

(255)

Changes in assets and liabilities, net of effects of acquisitions:

Accounts receivable

2,602 

2,794 

Income taxes, net

(245)

785 

Other assets

(115)


Accounts payable

(835)

(982)

Accrued expenses and other liabilities

(3,531)

(3,530)

Accrued revenue share

(871)

(444)

Deferred revenue

37 

137 

Net cash provided by operating activities

11,451 

19,289 

Investing activities

Purchases of property and equipment

(6,005)

(5,942)

Purchases of marketable securities

(37,563)

(36,426)

Maturities and sales of marketable securities

41,811 

39,248 

Purchases of non-marketable investments

(572)

(646)

Maturities and sales of non-marketable investments

260 

19 

Acquisitions, net of cash acquired, and purchases of intangible assets

(190)

(1,666)

Other investing activities

412 

30 

Net cash used in investing activities

(1,847)

(5,383)

Financing activities

Net payments related to stock-based award activities

(1,241)

(2,184)

Repurchases of capital stock

(8,496)

(11,395)

Proceeds from issuance of debt, net of costs

1,898 

900 

Repayments of debt

(1,947)

(937)

Proceeds from sale of interest in consolidated entities, net

1,600 

10 

Net cash used in financing activities

(8,186)

(13,606)

Effect of exchange rate changes on cash and cash equivalents

(272)

(143)

Net increase in cash and cash equivalents

1,146 

157 

Cash and cash equivalents at beginning of period

18,498 

26,465 

Cash and cash equivalents at end of period

$

19,644 

$

26,622 



See accompanying notes.







Alphabet Inc.




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)



Note 1. Nature of Operations and Summary of Significant Accounting Policies


Nature of Operations


Google was incorporated in California in September 1998 and re-incorporated in the State of Delaware in August 2003. In 2015, we implemented a holding company reorganization, and as a result, Alphabet became the successor issuer to Google.


We generate revenues by delivering relevant, cost-effective online advertising, cloud-based solutions that provide customers with platforms, collaboration tools and services, and sales of other products and services, such as apps and in-app purchases, digital content and subscriptions for digital content, and hardware.


Basis of Consolidation


The consolidated financial statements of Alphabet include the accounts of Alphabet and entities consolidated under the variable interest and voting models. All intercompany balances and transactions have been eliminated.


Unaudited Interim Financial Information


The Consolidated Balance Sheet as of March 31, 2021, the Consolidated Statements of Income for the three months ended March 31, 2020 and 2021, the Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2021, the Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2020 and 2021 and the Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2021 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). In our opinion, the unaudited interim consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of March 31, 2021, our results of operations for the three months ended March 31, 2020 and 2021, and our cash flows for the three months ended March 31, 2020 and 2021. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021.


These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC.


Use of Estimates


Preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the allowance for credit losses, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, and contingent liabilities, among others. We base our estimates on assumptions, both historical and forward looking, that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.


The allowance for credit losses on accounts receivable was $789 million and $719 million as of December 31, 2020 and March 31, 2021, respectively.


Change in Accounting Estimate


In January 2021, we completed an assessment of the useful lives of our servers and network equipment and adjusted the estimated useful life of our servers from three years to four years and the estimated useful life of certain network equipment from three years to five years. This change in accounting estimate was effective beginning in fiscal year 2021. Based on the carrying value of servers and certain network equipment as of December 31, 2020, and those acquired during the quarter ended March 31, 2021, the effect of this change in estimate was a reduction in depreciation expense of $835 million and an increase in net income of $650 million, or $0.97 per basic and $0.95 per diluted share, for the three months ended March 31, 2021.


Prior Period Reclassifications


Certain amounts in prior periods have been reclassified to conform with current period presentation.









Note 2. Revenues


Revenue Recognition


The following table presents our revenues disaggregated by type (in millions).

















Three Months Ended

March 31,

2020

2021

Google Search & other

$

24,502 

$

31,879 

YouTube ads

4,038 

6,005 

Google Network

5,223 

6,800 

Google advertising

33,763 

44,684 

Google other

4,435 

6,494 

Google Services total

38,198 

51,178 

Google Cloud

2,777 

4,047 

Other Bets

135 

198 

Hedging gains (losses)

49 

(109)

Total revenues

$

41,159 

$

55,314 




The following table presents our revenues disaggregated by geography, based on the addresses of our customers (in millions):















 

Three Months Ended

March 31,

 

2020

2021

United States

$

18,870 

46 

%

$

25,032 

45 

%


EMEA(1)


12,845 

31 

17,031 

31 


APAC(1)


7,238 

18 

10,455 

19 


Other Americas(1)


2,157 


2,905 


Hedging gains (losses)

49 


(109)


Total revenues

$

41,159 

100 

%

$

55,314 

100 

%



(1)    Regions represent Europe, the Middle East, and Africa (“EMEA”); Asia-Pacific (“APAC”); and Canada and Latin America (“Other Americas”).


Deferred Revenues and Remaining Performance Obligations


We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. Deferred revenues primarily relate to Google Cloud and Google other. Our total deferred revenue as of December 31, 2020 was $3.0 billion, of which $1.3 billion was recognized as revenues during the quarter ended March 31, 2021.


Additionally, we have performance obligations associated with commitments in customer contracts, primarily related to Google Cloud, for future services that have not yet been recognized as revenues, also referred to as remaining performance obligations. Remaining performance obligations include related deferred revenue currently recorded as well as amounts that will be invoiced in future periods, and excludes (i) contracts with an original expected term of one year or less, (ii) cancellable contracts, and (iii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. As of March 31, 2021, the amount not yet recognized as revenues from these commitments was $30.7 billion. We expect to recognize approximately half over the next 24 months with the remaining thereafter. However, the amount and timing of revenue recognition is largely driven by when the customer utilizes the services and our ability to deliver in accordance with relevant contract terms, which could affect our estimate of the remaining performance obligations and when we expect to recognize such as revenues.







Note 3. Financial Instruments



Debt Securities


We classify our marketable debt securities, which are accounted for as available-for-sale, within Level 2 in the fair value hierarchy because we use quoted market prices to the extent available or alternative pricing sources and models utilizing market observable inputs to determine fair value.


For certain marketable debt securities, we have elected the fair value option for which changes in fair value are recorded in other income (expense), net. The fair value option was elected for these securities to align with the unrealized gains and losses from related derivative contracts. Unrealized net gains related to debt securities still held where we have elected the fair value option were $87 million and $30 million as of December 31, 2020 and March 31, 2021, respectively. As of December 31, 2020 and March 31, 2021, the fair value of these debt securities was $2.0 billion for both periods.


The following tables summarize our debt securities, for which we did not elect the fair value option, by significant investment categories (in millions):














 

As of December 31, 2020

 

Adjusted

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Fair

Value

Cash and Cash

Equivalents

Marketable

Securities

Level 2:


Time deposits(1)


$

3,564 

$


$


$

3,564 

$

3,564 

$


Government bonds

55,156 

793 

(9)

55,940 

2,527 

53,413 

Corporate debt securities

31,521 

704 

(2)

32,223 


32,215 

Mortgage-backed and asset-backed securities

16,767 

364 

(7)

17,124 


17,124 

Total

$

107,008 

$

1,861 

$

(18)

$

108,851 

$

6,099 

$

102,752 













 

As of March 31, 2021

 

Adjusted

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Fair

Value

Cash and Cash

Equivalents

Marketable

Securities

Level 2:


Time deposits(1)


$

3,388 

$


$


$

3,388 

$

3,388 

$


Government bonds

50,757 

607 

(51)

51,313 

1,941 

49,372 

Corporate debt securities

32,702 

486 

(84)

33,104 


33,103 

Mortgage-backed and asset-backed securities

18,229 

265 

(49)

18,445 


18,445 

Total

$

105,076 

$

1,358 

$

(184)

$

106,250 

$

5,330 

$

100,920 



(1)The majority of our time deposits are domestic deposits.


We determine realized gains or losses on the sale or extinguishment of debt securities on a specific identification method. We recognized gross realized gains of $257 million and $135 million for the three months ended March 31, 2020 and 2021, respectively. We recognized gross realized losses of $39 million and $136 million for the three months ended March 31, 2020 and 2021, respectively. We reflect these gains and losses as a component of other income (expense), net.


The following table summarizes the estimated fair value of our investments in marketable debt securities by stated contractual maturity dates (in millions):












As of

March 31, 2021

Due in 1 year or less

$

20,220 

Due in 1 year through 5 years

65,995 

Due in 5 years through 10 years

2,829 

Due after 10 years

13,891 

Total

$

102,935 







The following tables present fair values and gross unrealized losses recorded to AOCI, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions):













 

As of December 31, 2020

 

Less than 12 Months

12 Months or Greater

Total

 

Fair Value

Unrealized

Loss

Fair Value

Unrealized

Loss

Fair Value

Unrealized

Loss

Government bonds

$

5,516 

$

(9)

$


$


$

5,519 

$

(9)

Corporate debt securities

1,999 

(1)



1,999 

(1)

Mortgage-backed and asset-backed securities

929 

(5)

242 

(2)

1,171 

(7)

Total

$

8,444 

$

(15)

$

245 

$

(2)

$

8,689 

$

(17)












 

As of March 31, 2021

 

Less than 12 Months

12 Months or Greater

Total

 

Fair Value

Unrealized

Loss

Fair Value

Unrealized

Loss

Fair Value

Unrealized

Loss

Government bonds

$

14,139 

$

(51)

$


$


$

14,139 

$

(51)

Corporate debt securities

11,443 

(54)



11,443 

(54)

Mortgage-backed and asset-backed securities

5,897 

(48)

154 

(1)

6,051 

(49)

Total

$

31,479 

$

(153)

$

154 

$

(1)

$

31,633 

$

(154)



During the three months ended March 31, 2020 and 2021, we did not recognize any significant credit losses and the ending allowance balances for credit losses were immaterial as of December 31, 2020 and March 31, 2021. See Note 6 for further details on other income (expense), net.



Equity Investments


The following discusses our marketable equity securities, non-marketable equity securities, gains and losses on marketable and non-marketable equity securities, as well as our equity securities accounted for under the equity method.


Our marketable equity securities are publicly traded stocks or funds measured at fair value and classified within Level 1 and 2 in the fair value hierarchy because we use quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar instruments in active markets.


Our non-marketable equity securities are investments in privately held companies without readily determinable market values. The carrying value of our non-marketable equity securities is adjusted to fair value upon observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). Non-marketable equity securities that have been remeasured during the period based on observable transactions are classified within Level 2 or Level 3 in the fair value hierarchy because we estimate the value based on valuation methods which may include a combination of the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the securities we hold. The fair value of non-marketable equity securities that have been remeasured due to impairment are classified within Level 3.






Gains and losses on marketable and non-marketable equity securities


Gains and losses reflected in other income (expense), net, for our marketable and non-marketable equity securities are summarized below (in millions):












Three Months Ended

March 31,

2020

2021

Net gain (loss) on equity securities sold during the period

$

171 

$

201 

Net unrealized gain (loss) on equity securities held as of the end of the period

(985)

4,636 

Total gain (loss) recognized in other income (expense), net

$

(814)

$

4,837 



In the table above, net gain (loss) on equity securities sold during the period reflects the difference between the sale proceeds and the carrying value of the equity securities at the beginning of the period or the purchase date, if later. 


Cumulative net gains (losses) on equity securities sold during the period, which is summarized in the following table (in millions), represents the total net gains (losses) recognized after the initial purchase date of the equity security. While these net gains may have been reflected in periods prior to the period of sale, we believe they are important supplemental information as they reflect the economic realized net gains on the securities sold during the period. Cumulative net gains are calculated as the difference between the sale price and the initial purchase price for the equity security sold during the period.













Equity Securities Sold

Three Months Ended

March 31,

 

2020

2021

Total sale price

$

909 

$

725 

Total initial cost

261 

357 

Cumulative net gains

$

648 

$

368 



Carrying value of marketable and non-marketable equity securities


The carrying value is measured as the total initial cost plus the cumulative net gain (loss). The carrying values for our marketable and non-marketable equity securities are summarized below (in millions):











As of December 31, 2020

Marketable Securities

Non-Marketable Securities

Total

Total initial cost

$

2,227 

$

14,616 

$

16,843 


Cumulative net gain (loss)(1)


3,631 

4,277 

7,908 


Carrying value(2)


$

5,858 

$

18,893 

$

24,751 



(1)Non-marketable equity securities cumulative net gain (loss) is comprised of $6.1 billion unrealized gains and $1.9 billion unrealized losses (including impairment).


(2)The long-term portion of marketable equity securities of $429 million is included within other non-current assets.











As of March 31, 2021


Marketable Securities(2)


Non-Marketable Securities

Total

Total initial cost

$

2,421 

$

14,485 

$

16,906 


Cumulative net gain(1)


3,589 

8,795 

12,384 


Carrying value(2)


$

6,010 

$

23,280 

$

29,290 



(1)Non-marketable equity securities cumulative net gain is comprised of $10.6 billion unrealized gains and $1.8 billion unrealized losses (including impairment).


(2)The long-term portion of marketable equity securities of $463 million is included within other non-current assets.






Marketable equity securities


The following table summarizes marketable equity securities measured at fair value by significant investment categories (in millions):















 

As of December 31, 2020

As of March 31, 2021

 

Cash and Cash Equivalents

Marketable

Securities

Cash and Cash Equivalents

Marketable

Securities

Level 1:

Money market funds

$

12,210 

$


$

13,679 

$


Marketable equity securities(1)(2)



5,470 


5,670 

12,210 

5,470 

13,679 

5,670 

Level 2:

Mutual funds


388 


340 

Total

$

12,210 

$

5,858 

$

13,679 

$

6,010 



(1)The balance as of December 31, 2020 and March 31, 2021 includes investments that were reclassified from non-marketable equity securities following the commencement of public market trading of the issuers or acquisition by public entities (certain of which are subject to short-term lock-up restrictions).


(2)As of December 31, 2020 and March 31, 2021 the long-term portion of marketable equity securities of $429 million and $463 million, respectively, is included within other non-current assets.


Non-marketable equity securities


The following is a summary of unrealized gains and losses recorded in other income (expense), net, and included as adjustments to the carrying value of non-marketable equity securities (in millions):












Three Months Ended

March 31,

2020

2021

Unrealized gains

$

356 

$

4,678 

Unrealized losses (including impairment)

(1,304)

(2)

Total unrealized gain (loss) for non-marketable equity securities

$

(948)

$

4,676 



During the three months ended March 31, 2021, included in the $23.3 billion of non-marketable equity securities, $10.3 billion were measured at fair value primarily based on observable market transactions, resulting in a net unrealized gain of $4.7 billion.


Equity securities accounted for under the Equity Method


As of December 31, 2020 and March 31, 2021, equity securities accounted for under the equity method had a carrying value of approximately $1.4 billion and $1.6 billion, respectively. Our share of gains and losses including impairment are included as a component of other income (expense), net, in the Consolidated Statements of Income. See Note 6 for further details on other income (expense), net.



Derivative Financial Instruments


We enter into derivative instruments to manage risks relating to our ongoing business operations. The primary risk managed with derivative instruments is foreign exchange risk. We use foreign currency contracts to reduce the risk that our cash flows, earnings, and investment in foreign subsidiaries will be adversely affected by foreign currency exchange rate fluctuations. We also enter into derivative instruments to partially offset our exposure to other risks and enhance investment returns.


We recognize derivative instruments as either assets or liabilities in the Consolidated Balance Sheets at fair value and classify the derivatives primarily within Level 2 in the fair value hierarchy. We present our collar contracts (an option strategy comprised of a combination of purchased and written options) at net fair values where both the purchased and written options are with the same counterparty. For other derivative contracts, we present at gross fair values. We primarily record changes in the fair value in the Consolidated Statements of Income as either other income (expense), net, or revenues, or in the Consolidated Balance Sheets in AOCI, as discussed below.


We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. Further, we enter into collateral security arrangements that provide for collateral to be received or pledged when the net fair value of certain financial instruments fluctuates from






contractually established thresholds. Cash collateral received related to derivative instruments under our collateral security arrangements are included in other current assets with a corresponding liability. Cash and non-cash collateral pledged related to derivative instruments under our collateral security arrangements are included in other current assets.


Cash Flow Hedges


We designate foreign currency forward and option contracts (including collars) as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the U.S. dollar. These contracts have maturities of 24 months or less.


Cash flow hedge amounts included in the assessment of hedge effectiveness are deferred in AOCI and subsequently reclassified to revenue when the hedged item is recognized in earnings. We exclude the change in forward points and time value from our assessment of hedge effectiveness. The initial value of the excluded component is amortized on a straight-line basis over the life of the hedging instrument and recognized in revenues. The difference between fair value changes of the excluded component and the amount amortized to revenues is recorded in AOCI. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI are reclassified to other income (expense), net in the period of de-designation.


As of March 31, 2021, the net accumulated gain on our foreign currency cash flow hedges before tax effect was $143 million, which is expected to be reclassified from AOCI into earnings within the next 12 months.


Fair Value Hedges


We designate foreign currency forward contracts as fair value hedges to hedge foreign currency risks for our investments denominated in currencies other than the U.S. dollar. Fair value hedge amounts included in the assessment of hedge effectiveness are recognized in other income (expense), net, along with the offsetting gains and losses of the related hedged items. We exclude changes in forward points from the assessment of hedge effectiveness and recognize changes in the excluded component in other income (expense), net.


Net Investment Hedges


We designate foreign currency forward contracts as net investment hedges to hedge the foreign currency risks related to our investment in foreign subsidiaries. Net investment hedge amounts included in the assessment of hedge effectiveness are recognized in AOCI along with the foreign currency translation adjustment. We exclude changes in forward points from the assessment of hedge effectiveness and recognize changes in the excluded component in other income (expense), net.


Other Derivatives


Other derivatives not designated as hedging instruments consist primarily of foreign currency forward contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the functional currency of a subsidiary. Gains and losses on these contracts, as well as the related costs, are recognized in other income (expense), net, along with the foreign currency gains and losses on monetary assets and liabilities.


We also use derivatives not designated as hedging instruments to manage risks relating to interest rates, commodity prices, credit exposures and to enhance investment returns. Additionally, from time to time, we enter into derivatives to hedge the market price risk on certain of our marketable equity securities. Gains (losses) arising from these derivatives are reflected within the “other” component of other income (expense), net and the offsetting recognized gains (losses) on the marketable equity securities are reflected within the gain (loss) on equity securities, net component of other income (expense), net. See Note 6 for further details on other income (expense), net.






The gross notional amounts of our outstanding derivative instruments were as follows (in millions):















As of December 31, 2020

As of March 31, 2021

Derivatives Designated as Hedging Instruments:


Foreign exchange contracts

    Cash flow hedges

$

10,187 

$

13,824 

    Fair value hedges

$

1,569 

$

2,548 

    Net investment hedges

$

9,965 

$

12,473 

Derivatives Not Designated as Hedging Instruments:

Foreign exchange contracts

$

39,861 

$

40,326 

Other contracts

$

2,399 

$

2,931 


The fair values of our outstanding derivative instruments were as follows (in millions):


















 

 

As of December 31, 2020


  


Balance Sheet Location

Fair Value of Derivatives Designated as Hedging Instruments

Fair Value of

Derivatives Not

Designated as

Hedging Instruments

Total Fair Value

Derivative Assets:

Level 2:

Foreign exchange contracts

Other current and non-current assets

$

33 

$

316 

$

349 

Other contracts

Other current and non-current assets


16 

16 

Total

$

33 

$

332 

$

365 

Derivative Liabilities:

Level 2:

Foreign exchange contracts

Accrued expenses and other liabilities, current and non-current

$

395 

$

185 

$

580 

Other contracts

Accrued expenses and other liabilities, current and non-current


942 

942 

Total

$

395 

$

1,127 

$

1,522 

















 

 

As of March 31, 2021


  


Balance Sheet Location

Fair Value of

Derivatives

Designated as

Hedging Instruments

Fair Value of

Derivatives Not

Designated as

Hedging Instruments

Total Fair Value

Derivative Assets:

Level 2:

Foreign exchange contracts

Other current and non-current assets

$

482 

$

162 

$

644 

Other contracts

Other current and non-current assets


27 

27 

Total

$

482 

$

189 

$

671 

Derivative Liabilities:

Level 2:

Foreign exchange contracts

Accrued expenses and other liabilities, current and non-current

$

57 

$

268 

$

325 

Other contracts

Accrued expenses and other liabilities, current and non-current


654 

654 

Total

$

57 

$

922 

$

979 







The gains (losses) on derivatives in cash flow hedging and net investment hedging relationships recognized in other comprehensive income (“OCI”) are summarized below (in millions):



















 

Gains (Losses) Recognized in OCI on Derivatives Before Tax Effect

Three Months Ended

 

March 31,

2020

2021

Derivatives in Cash Flow Hedging Relationship:

Foreign exchange contracts

Amount included in the assessment of effectiveness

$

412 

$

162 

Amount excluded from the assessment of effectiveness

52 

49 

Derivatives in Net Investment Hedging Relationship:

Foreign exchange contracts

Amount included in the assessment of effectiveness

80 

378 

Total

$

544 

$

589 








 The effect of derivative instruments on income is summarized below (in millions):





























 

Gains (Losses) Recognized in Income

Three Months Ended

 

March 31,

2020

2021

Revenues

Other income (expense), net

Revenues

Other income (expense), net

Total amounts presented in the Consolidated Statements of Income in which the effects of cash flow and fair value hedges are recorded

$

41,159 

$

(220)

$

55,314 

$

4,846 

Gains (Losses) on Derivatives in Cash Flow Hedging Relationship:

Foreign exchange contracts

Amount of gains (losses) reclassified from AOCI to income

$

26 

$


$

(105)

$


Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach

23 


(4)


Gains (Losses) on Derivatives in Fair Value Hedging Relationship:

Foreign exchange contracts

Hedged items


(17)



Derivatives designated as hedging instruments


17 



Amount excluded from the assessment of effectiveness





Gains (Losses) on Derivatives in Net Investment Hedging Relationship:

Foreign exchange contracts

Amount excluded from the assessment of effectiveness


78 


20 

Gains (Losses) on Derivatives Not Designated as Hedging Instruments:

Foreign exchange contracts


229 


(340)

Other Contracts


(28)


323 

Total gains (losses)

$

49 

$

280 

$

(109)

$











Offsetting of Derivatives


The gross amounts of our derivative instruments subject to master netting arrangements with various counterparties, and cash and non-cash collateral received and pledged under such agreements were as follows (in millions):


Offsetting of Assets













As of December 31, 2020

Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset

Gross Amounts of Recognized Assets

Gross Amounts Offset in the Consolidated Balance Sheets

Net Presented in the Consolidated Balance Sheets

Financial Instruments

 Cash Collateral Received

Non-Cash Collateral Received

Net Assets Exposed

Derivatives

$

397 

$

(32)

$

365 

$

(295)


(1)


$

(16)

$


$

54 

As of March 31, 2021

Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset

Gross Amounts of Recognized Assets

Gross Amounts Offset in the Consolidated Balance Sheets

Net Presented in the Consolidated Balance Sheets

Financial Instruments

Cash Collateral Received

Non-Cash Collateral Received

Net Assets Exposed

Derivatives

$

724 

$

(53)

$

671 

$

(299)


(1)


$

(218)

$


$

154 



(1)The balances as of December 31, 2020 and March 31, 2021 were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with our master netting agreements.


Offsetting of Liabilities















As of December 31, 2020

Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset

Gross Amounts of Recognized Liabilities

Gross Amounts Offset in the Consolidated Balance Sheets

Net Presented in the Consolidated Balance Sheets

Financial Instruments

 Cash Collateral Pledged

Non-Cash Collateral Pledged

Net Liabilities

Derivatives

$

1,554 

$

(32)

$

1,522 

$

(295)


(2)


$

(1)

$

(943)

$

283 

As of March 31, 2021

Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset

Gross Amounts of Recognized Liabilities

Gross Amounts Offset in the Consolidated Balance Sheets

Net Presented in the Consolidated Balance Sheets

Financial Instruments

 Cash Collateral Pledged

Non-Cash Collateral Pledged

Net Liabilities

Derivatives

$

1,032 

$

(53)

$

979 

$

(299)


(2)


$


$

(649)

$

31 



(2)    The balances as of December 31, 2020 and March 31, 2021 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.



Note 4. Variable Interest Entities


Consolidated VIEs


We consolidate VIEs in which we hold a variable interest and are the primary beneficiary. The results of operations and financial position of these VIEs are included in our consolidated financial statements.


For certain consolidated VIEs, their assets are not available to us and their creditors do not have recourse to us. As of December 31, 2020 and March 31, 2021, assets that can only be used to settle obligations of these VIEs were $5.7 billion and $5.4 billion, respectively, and the liabilities for which creditors only have recourse to the VIEs were $2.3 billion and $2.2 billion, respectively.


Total noncontrolling interests (“NCI”), including redeemable noncontrolling interests (“RNCI”), in our consolidated subsidiaries was $3.9 billion and $3.8 billion as of December 31, 2020 to March 31, 2021, respectively.






NCI and RNCI are included within additional paid-in capital. Net loss attributable to noncontrolling interests was not material for any period presented and is included within the “other” component of other income (expense), net. See Note 6 for further details on other income (expense), net.


Unconsolidated VIEs


We have investments in some VIEs in which we are not the primary beneficiary. These VIEs include private companies that are primarily early stage companies and certain renewable energy entities in which activities involve power generation using renewable sources.


We have determined that the governance structures of these entities do not allow us to direct the activities that would significantly affect their economic performance. Therefore, we are not the primary beneficiary, and the results of operations and financial position of these VIEs are not included in our consolidated financial statements. We account for these investments as non-marketable equity investments or equity method investments.


VIEs are generally based on the current carrying value of the investments and any future funding commitments. We have determined that the single source of our exposure to these VIEs is our capital investments in them. The carrying value and maximum exposure of these unconsolidated VIEs were not material as of December 31, 2020 and March 31, 2021.



Note 5. Debt


Short-Term Debt


We have a 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 of December 31, 2020 and March 31, 2021.


Our short-term debt balance also includes the current portion of certain long-term debt.


Long-Term Debt


The total outstanding debt is summarized below (in millions, except percentages):















Maturity

Coupon Rate

Effective Interest Rate

As of December 31, 2020

As of

March 31, 2021

Debt

2011-2020 Notes Issuances

2021 – 2060


0.45% – 3.63%


0.57% – 3.73%


$

14,000 

$

14,000 


Future finance lease payments, net(1)


1,201 

1,142 

      Total debt

15,201 

15,142 

Unamortized discount and debt issuance costs

(169)

(165)


Less: Current portion of Notes(2)


(999)

(1,000)


Less: Current portion future finance lease payments, net(1)(2)


(101)

(90)

       Total long-term debt

$

13,932 

$

13,887 



(1)Net of imputed interest.


(2)Total current portion of long-term debt is included within other accrued expenses and current liabilities. See Note 6.


The notes in the table above are comprised of fixed-rate senior unsecured obligations and generally rank equally with each other. We may redeem the notes at any time in whole or in part at specified redemption prices. The effective interest rates are based on proceeds received with interest payable semi-annually.


The total estimated fair value of the outstanding notes, including the current portion, was approximately $14.0 billion and $13.0 billion as of December 31, 2020 and March 31, 2021, respectively. The fair value was determined based on observable market prices of identical instruments in less active markets and is categorized accordingly as Level 2 in the fair value hierarchy.


Credit Facility


As of March 31, 2021, we have $4.0 billion of revolving credit facilities. No amounts were outstanding under the credit facilities as of December 31, 2020 and March 31, 2021.






In April 2021, we terminated the existing revolving credit facilities, which were scheduled to expire in July 2023, and entered into two new revolving credit facilities in the amounts of $4.0 billion and $6.0 billion, which will expire in April 2022 and April 2026, respectively. The interest rates for the new credit facilities are determined based on a formula using certain market rates, as well as our progress toward the achievement of certain sustainability goals. No amounts have been borrowed under the new credit facilities.



Note 6. Supplemental Financial Statement Information


Property and Equipment, Net


Property and equipment, net, consisted of the following (in millions):















As of

December 31, 2020

As of

March 31, 2021

Land and buildings

$

49,732 

$

52,522 

Information technology assets

45,906 

47,893 

Construction in progress

23,111 

22,556 

Leasehold improvements

7,516 

7,789 

Furniture and fixtures

197 

198 

Property and equipment, gross

126,462 

130,958 

Less: accumulated depreciation

(41,713)

(43,352)

Property and equipment, net

$

84,749 

$

87,606 



Accrued expenses and other current liabilities


Accrued expenses and other current liabilities consisted of the following (in millions):














As of

December 31, 2020

As of

March 31, 2021


European Commission fines(1)


$

10,409 

$

10,099 

Payables to brokers for unsettled investment trades

754 

3,345 

Accrued customer liabilities

3,118 

2,991 

Accrued purchases of property and equipment

2,197 

2,107 

Current operating lease liabilities

1,694 

1,888 

Other accrued expenses and current liabilities

10,459 

10,302 

Accrued expenses and other current liabilities

$

28,631 

$

30,732 



(1)    Includes the effects of foreign exchange and interest. See Note 9 for further details.


Accumulated Other Comprehensive Income (Loss)


The components of AOCI, net of income tax, were as follows (in millions):













Foreign Currency Translation Adjustments

Unrealized Gains (Losses) on Available-for-Sale Investments

Unrealized Gains (Losses) on Cash Flow Hedges

Total

Balance as of December 31, 2019

$

(2,003)

$

812 

$

(41)

$

(1,232)

Other comprehensive income (loss) before reclassifications

(550)

498 

326 

274 

Amounts excluded from the assessment of hedge effectiveness recorded in AOCI



52 

52 

Amounts reclassified from AOCI


(169)

(22)

(191)

Other comprehensive income (loss)

(550)

329 

356 

135 

Balance as of March 31, 2020

$

(2,553)

$

1,141 

$

315 

$

(1,097)



















Foreign Currency Translation Adjustments

Unrealized Gains (Losses) on Available-for-Sale Investments

Unrealized Gains (Losses) on Cash Flow Hedges

Total

Balance as of December 31, 2020

$

(864)

$

1,612 

$

(115)

$

633 

Other comprehensive income (loss) before reclassifications

(423)

(488)

130 

(781)

Amounts excluded from the assessment of hedge effectiveness recorded in AOCI



49 

49 

Amounts reclassified from AOCI


11 

85 

96 

Other comprehensive income (loss)

(423)

(477)

264 

(636)

Balance as of March 31, 2021

$

(1,287)

$

1,135 

$

149 

$

(3)


The effects on net income of amounts reclassified from AOCI were as follows (in millions):



















Gains (Losses) Reclassified from AOCI to the Consolidated Statements of Income

Three Months Ended

 

March 31,

 AOCI Components

Location

2020

2021

Unrealized gains (losses) on available-for-sale investments

Other income (expense), net

$

214 

$

(14)

Benefit (provision) for income taxes

(45)


Net of income tax

169 

(11)

Unrealized gains (losses) on cash flow hedges

Foreign exchange contracts

Revenue

26 

(105)

Interest rate contracts

Other income (expense), net



Benefit (provision) for income taxes

(5)

19 

Net of income tax

22 

(85)

Total amount reclassified, net of income tax

$

191 

$

(96)




Other Income (Expense), Net


The components of other income (expense), net, were as follows (in millions):
















 

Three Months Ended

March 31,

 

2020

2021

Interest income

$

586 

$

345 


Interest expense(1)


(21)

(76)

Foreign currency exchange gain (loss), net

(81)

113 

Gain (loss) on debt securities, net

12 

(86)

Gain (loss) on equity securities, net

(814)

4,837 

Performance fees


(665)

Income and impairment from equity method investments, net

74 


Other

18 

373 

Other income (expense), net

$

(220)

$

4,846 



(1)Interest expense is net of interest capitalized of $52 million and $47 million for the three months ended March 31, 2020 and 2021, respectively.







Note 7. Acquisitions


Fitbit


In January 2021, we closed the acquisition of Fitbit, Inc. for $2.1 billion. The addition of Fitbit to Google Services is expected to help spur innovation in wearable devices.


The assets acquired and liabilities assumed were recorded at fair value. The purchase price excludes post acquisition compensation arrangements. The purchase price was attributed to $440 million cash acquired, $590 million of intangible assets, $1.2 billion of goodwill and $110 million of net liabilities assumed. Goodwill was recorded in the Google Services segment and primarily attributable to synergies expected to arise after the acquisition. Goodwill is not expected to be deductible for tax purposes.



Note 8. Goodwill and Other Intangible Assets


Goodwill


Changes in the carrying amount of goodwill for the three months ended March 31, 2021 were as follows (in millions):











Google Services

Google Cloud

Other Bets

Total

Balance as of December 31, 2020

$

18,517 

$

1,957 

$

701 

$

21,175 

Acquisitions

1,191 



1,191 

Foreign currency translation and other adjustments

(13)

(1)

(11)

(25)

Balance as of March 31, 2021

$

19,695 

$

1,956 

$

690 

$

22,341 





Other Intangible Assets


Information regarding purchased intangible assets were as follows (in millions):










As of December 31, 2020

 

Gross

Carrying

Amount

Accumulated

Amortization

Net

Carrying

Amount

Patents and developed technology

$

4,639 

$

3,649 

$

990 

Customer relationships

266 

49 

217 

Trade names and other

699 

461 

238 

Total

$

5,604 

$

4,159 

$

1,445 











As of March 31, 2021

Gross

Carrying

Amount

Accumulated

Amortization

Net

Carrying

Amount

Patents and developed technology

$

4,811 

$

3,774 

$

1,037 

Customer relationships

468 

72 

396 

Trade names and other

864 

474 

390 

Total

$

6,143 

$

4,320 

$

1,823 



For all intangible assets acquired and purchased during the three months ended March 31, 2021, patents and developed technology have a weighted-average useful life of 4.0 years, customer relationships have a weighted-average useful life of 3.8 years, and trade names and other have a weighted-average useful life of 10.0 years.


Amortization expense relating to purchased intangible assets was $204 million and $217 million for the three months ended March 31, 2020 and 2021, respectively.






As of March 31, 2021, expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter was as follows (in millions):













Remainder of 2021

$

630 

2022

504 

2023

223 

2024

196 

2025

74 

Thereafter

196 

Total

$

1,823 





Note 9. Contingencies


Indemnifications


In the normal course of business, to facilitate transactions in our services and products, we indemnify certain parties, including advertisers, Google Network partners, customers of Google Cloud offerings, and lessors with respect to certain matters. We have agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. Several of these agreements limit the time within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our officers and directors, and our bylaws contain similar indemnification obligations to our agents.


It is not possible to make a reasonable estimate of the maximum potential amount under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement. Additionally, we have a limited history of prior indemnification claims and the payments we have made under such agreements have not had a material adverse effect on our results of operations, cash flows, or financial position. However, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our results of operations or cash flows in a particular period.


As of March 31, 2021, we did not have any material indemnification claims that were probable or reasonably possible.


Legal Matters


Antitrust Investigations


On November 30, 2010, the EC’s Directorate General for Competition opened an investigation into various antitrust-related complaints against us.


On June 27, 2017, the EC announced its decision that certain actions taken by Google regarding its display and ranking of shopping search results and ads infringed European competition law. The EC decision imposed a €2.4 billion ($2.7 billion as of June 27, 2017) fine. On September 11, 2017, we appealed the EC decision and on September 27, 2017, we implemented product changes to bring shopping ads into compliance with the EC’s decision. We recognized a charge of $2.7 billion for the fine in the second quarter of 2017.


On July 18, 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 and directed the termination of the conduct at issue. On October 9, 2018, we appealed the EC decision. On October 29, 2018, we implemented changes to certain of our Android distribution practices. We recognized a charge of $5.1 billion for the fine in the second quarter of 2018.


On March 20, 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 fine of €1.5 billion ($1.7 billion as of March 20, 2019) and directed actions related to AdSense for Search partners’ agreements, which we implemented prior to the decision. On June 4, 2019, we appealed the EC decision. We recognized a charge of $1.7 billion for the fine in the first quarter of 2019.


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.


From time to time we are subject to formal and informal inquiries and investigations on competition matters by regulatory authorities in the United States, Europe, and other jurisdictions. For example, in August 2019, we began receiving civil investigative demands from the U.S. Department of Justice (“DOJ”) requesting information and






documents relating to our prior antitrust investigations and certain aspects of our business. The DOJ and a number of state Attorneys General filed a lawsuit on October 20, 2020 alleging that Google violated U.S. antitrust laws relating to Search and Search advertising. Separately, on December 16, 2020, a number of state Attorneys General filed an antitrust complaint against Google in the United States District Court for the Eastern District of Texas, alleging that Google violated U.S. antitrust laws as well as state deceptive trade laws relating to its advertising technology. We believe these complaints are without merit and will defend ourselves vigorously. The DOJ and state Attorneys General continue their investigations into certain aspects of our business. We continue to cooperate with federal and state regulators in the United States, and other regulators around the world.


Patent and Intellectual Property Claims


We have had patent, copyright, trade secret, and trademark infringement lawsuits filed against us claiming that certain of our products, services, and technologies infringe others’ intellectual property rights. Adverse results in these lawsuits may include awards of substantial monetary damages, costly royalty or licensing agreements, or orders preventing us from offering certain features, functionalities, products, or services. As a result, we may have to change our business practices, and develop non-infringing products or technologies, which could result in a loss of revenues for us and otherwise harm our business. In addition, the U.S. International Trade Commission (“ITC”) has increasingly become an important forum to litigate intellectual property disputes because an ultimate loss in an ITC action can result in a prohibition on importing infringing products into the U.S. Because the U.S. is an important market, a prohibition on importation could have an adverse effect on us, including preventing us from importing many important products into the U.S. or necessitating workarounds that may limit certain features of our products.


Furthermore, many of our agreements with our customers and partners require us to indemnify them against certain intellectual property infringement claims, which would increase our costs as a result of defending such claims, and may require that we pay significant damages if there were an adverse ruling in any such claims. In addition, our customers and partners may discontinue the use of our products, services, and technologies, as a result of injunctions or otherwise, which could result in loss of revenues and adversely affect our business.


In 2010, Oracle America, Inc. (“Oracle”) brought a copyright lawsuit against Google in the Northern District of California, alleging that Google’s Android operating system infringes Oracle’s copyrights related to certain Java application programming interfaces (“Java APIs”). After trial, final judgment was entered by the district court in favor of Google on June 8, 2016, and the court decided post-trial motions in favor of Google. Oracle appealed and on March 27, 2018, the Federal Circuit Court of Appeals reversed and remanded the case for a trial on damages. On May 29, 2018, we filed a petition for a rehearing at the Federal Circuit, and on August 28, 2018, the Federal Circuit denied the petition. On January 24, 2019, we filed a petition to the Supreme Court of the United States to review the case. On April 29, 2019, the Supreme Court requested the views of the Solicitor General regarding our petition. On September 27, 2019, the Solicitor General recommended denying our petition, and we provided our response on October 16, 2019. On November 15, 2019, the Supreme Court granted our petition and made a decision to review the case. The Supreme Court heard oral arguments in our case on October 7, 2020. On April 5, 2021, the Supreme Court reversed the Federal Circuit’s ruling and found that Google’s use of the Java APIs was a fair use as a matter of law. The Supreme Court remanded the case to the Federal Circuit for further proceedings in conformity with the Supreme Court opinion.


Other


We are also regularly subject to claims, suits, regulatory and government investigations, and other proceedings involving competition, intellectual property, privacy, tax and related compliance, labor and employment, commercial disputes, content generated by our users, goods and services offered by advertisers or publishers using our platforms, personal injury, consumer protection, and other matters. Such claims, suits, regulatory and government investigations, and other proceedings could result in substantial fines and penalties, injunctive relief, ongoing auditing and monitoring obligations, changes to our products and services, alterations to our business models and operations, and collateral related civil litigation or other adverse consequences, all of which could harm our business, reputation, financial condition, and operating results.


Certain of these outstanding matters include speculative, substantial or indeterminate monetary amounts. 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 reasonably possible loss. We evaluate 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 as appropriate. Significant judgment is required to determine both likelihood of there being and the estimated amount of a loss related to such matters.






With respect to our outstanding matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will not, either individually or in aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such matters is inherently unpredictable and subject to significant uncertainties.


We expense legal fees in the period in which they are incurred.


Non-Income Taxes


We are under audit by various domestic and foreign tax authorities with regards to non-income tax matters. The subject matter of non-income tax audits primarily arises from disputes on the tax treatment and tax rate applied to the sale of our products and services in these jurisdictions and the tax treatment of certain employee benefits. We accrue non-income taxes that may result from examinations by, or any negotiated agreements with, these tax authorities when a loss is probable and reasonably estimable. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the reasonably possible loss. Due to the inherent complexity and uncertainty of these matters and judicial process in certain jurisdictions, the final outcome may be materially different from our expectations.


For information regarding income tax contingencies, see Note 13.



Note 10. Stockholders’ Equity


Share Repurchases


In July 2020, the Board of Directors of Alphabet authorized the company to repurchase up to $28.0 billion of its Class C capital stock. As of March 31, 2021, $6.3 billion remains available for repurchase. In April 2021, the Board of Directors of Alphabet authorized the company to repurchase up to an additional $50.0 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.


During the three months ended March 31, 2021, we repurchased and subsequently retired 5.7 million shares of Alphabet Class C capital stock for an aggregate amount of $11.4 billion.









Note 11. Net Income Per Share


The following table sets forth the computation of basic and diluted net income per share of Class A and Class B common stock and Class C capital stock (in millions, except share amounts which are reflected in thousands, and per share amounts):










































Three Months Ended March 31,

 

2020

2021

 

Class A

Class B

Class C

Class A

Class B

Class C

Basic net income per share:

Numerator

Allocation of undistributed earnings

$

2,990 

$

462 

$

3,384 

$

8,011 

$

1,221 

$

8,698 

Denominator

Number of shares used in per share computation

300,249 

46,424 

339,792 

300,800 

45,840 

326,580 

Basic net income per share

$

9.96 

$

9.96 

$

9.96 

$

26.63 

$

26.63 

$

26.63 

Diluted net income per share:

Numerator

Allocation of undistributed earnings for basic computation

$

2,990 

$

462 

$

3,384 

$

8,011 

$

1,221 

$

8,698 

Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares

462 



1,221 



Reallocation of undistributed earnings

(27)

(4)

27 

(119)

(16)

119 

Allocation of undistributed earnings

$

3,425 

$

458 

$

3,411 

$

9,113 

$

1,205 

$

8,817 

Denominator

Number of shares used in basic computation

300,249 

46,424 

339,792 

300,800 

45,840 

326,580 

Weighted-average effect of dilutive securities

Add:

Conversion of Class B to Class A common shares outstanding

46,424 



45,840 



Restricted stock units and other contingently issuable shares

180 


5,622 

18 


8,833 

Number of shares used in per share computation

346,853 

46,424 

345,414 

346,658 

45,840 

335,413 

Diluted net income per share

$

9.87 

$

9.87 

$

9.87 

$

26.29 

$

26.29 

$

26.29 



For the periods presented above, the net income per share amounts are the same for Class A and Class B common stock and Class C capital stock because the holders of each class are entitled to equal per share dividends or distributions in liquidation in accordance with the Amended and Restated Certificate of Incorporation of Alphabet Inc.



Note 12. Compensation Plans


Stock-Based Compensation


For the three months ended March 31, 2020 and 2021, total stock-based compensation (“SBC”) expense was $3.4 billion and $3.8 billion, including amounts associated with awards we expect to settle in Alphabet stock of $3.2 billion and $3.7 billion, respectively.








Stock-Based Award Activities


The following table summarizes the activities for our unvested restricted stock units (“RSUs”) in Alphabet stock for the three months ended March 31, 2021:












 

Unvested Restricted Stock Units

 

Number of

Shares

Weighted-

Average

Grant-Date

Fair Value

Unvested as of December 31, 2020

19,288,793 

$

1,262.13 

Granted

8,307,146 

$

1,757.60 

 Vested

(2,545,630)

$

1,304.28 

 Forfeited/canceled

(476,857)

$

1,366.45 

Unvested as of March 31, 2021

24,573,452 

$

1,427.60 



As of March 31, 2021, there was $33.1 billion of unrecognized compensation cost related to unvested employee RSUs. This amount is expected to be recognized over a weighted-average period of 2.8 years.



Note 13. Income Taxes


Our effective tax rate for the three months ended March 31, 2021 was lower than the U.S. federal statutory rate, primarily due to the Foreign-Derived Intangible Income tax benefit, the U.S. Research and Development Tax Credit, and stock-based compensation related tax benefits. Our effective tax rate is based on forecasted annual income before income taxes (“pre-tax earnings”) which may fluctuate through the rest of the year.


Our effective tax rate for the three months ended March 31, 2020 was lower than the U.S. federal statutory rate primarily due to the U.S. Research and Development Tax Credit, the Foreign-Derived Intangible Income tax benefit, and stock-based compensation related tax benefits.


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 total gross unrecognized tax benefits were $3.8 billion and $4.3 billion as of December 31, 2020 and March 31, 2021. Our total unrecognized tax benefits that, if recognized, would affect our effective tax rate were $2.6 billion and $3.0 billion as of December 31, 2020 and March 31, 2021. Although the timing of the resolution, settlement, and closure of audits is not certain, we do not believe it is reasonably possible that our unrecognized tax benefits will materially change in the next 12 months.


For information regarding non-income taxes, see Note 9.



Note 14. Information about Segments and Geographic Areas


Beginning in the fourth quarter of 2020, we report our segment results as Google Services, Google Cloud, and Other Bets:


Google Services includes products and services such as ads, Android, Chrome, hardware, Google Maps, Google Play, Search, and YouTube. Google Services generates revenues primarily from advertising; sales of apps, in-app purchases, digital content products, and hardware; and fees received for subscription-based products such as YouTube Premium and YouTube TV.


Google Cloud includes Google’s infrastructure and data analytics platforms, collaboration tools, and other services for enterprise customers. Google Cloud generates revenues primarily from fees received for Google Cloud Platform services and Google Workspace collaboration tools.


Other Bets is a combination of multiple operating segments that are not individually material. Revenues from the Other Bets are derived primarily through the sale of internet services as well as licensing and R&D services.


Revenues and certain costs, such as costs associated with content and traffic acquisition, certain engineering, and hardware costs and other operating expenses, are directly attributable to our segments. Due to the integrated nature of Alphabet, other costs and expenses, such as technical infrastructure and office facilities, are managed centrally at a consolidated level. The associated costs, including depreciation and impairment, are allocated to operating segments as a service cost generally based on usage or headcount.






Unallocated corporate costs primarily include corporate initiatives, corporate shared costs, such as finance and legal, including fines and settlements, as well as costs associated with certain shared research and development activities. Additionally, hedging gains (losses) related to revenue are included in corporate costs.


Our Chief Operating Decision Maker does not evaluate operating segments using asset information.


Information about segments during the periods presented were as follows (in millions). For comparative purposes, amounts in prior periods have been recast:















 

Three Months Ended

March 31,

 

2020

2021

Revenues:

Google Services

$

38,198 

$

51,178 

Google Cloud

2,777 

4,047 

Other Bets

135 

198 

Hedging gains (losses)

49 

(109)

Total revenues

$

41,159 

$

55,314 














 

Three Months Ended

March 31,

 

2020

2021

Operating income (loss):

Google Services

$

11,548 

$

19,546 

Google Cloud

(1,730)

(974)

Other Bets

(1,121)

(1,145)

Corporate costs, unallocated

(720)

(990)

Total income from operations

$

7,977 

$

16,437 



For revenues by geography, see Note 2.


The following table presents our long-lived assets by geographic area, which includes property and equipment, net and operating lease assets (in millions):











As of

December 31, 2020

As of

March 31, 2021

Long-lived assets:

United States

$

69,315 

$

71,972 

International

27,645 

28,232 

Total long-lived assets

$

96,960 

$

100,204 











ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Please read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q.



The Impact of COVID-19 on our Results and Operations


We began to observe the impact of COVID-19 on our financial results in March 2020 when, despite an increase in users’ search activity, our advertising revenues declined compared to the prior year due to a shift of user search activity to less commercial topics and reduced spending by our advertisers. For the quarter ended June 30, 2020, our advertising revenues declined due to the continued impacts of COVID-19 and the related reductions in global economic activity. During the course of the quarter ended June 30, 2020, we observed a gradual return in user search activity to more commercial topics, followed by increased spending by our advertisers that continued throughout the second half of 2020. Additionally, over the course of 2020, we experienced variability in our margins as many of our expenses are less variable in nature and/or may not correlate to changes in revenues. Market volatility contributed to fluctuations in the valuation of our equity investments. Further, our assessment of the credit deterioration of our customers due to changes in the macroeconomic environment during the period was reflected in our allowance for credit losses for accounts receivable.


During the first quarter of 2021, we continued to benefit from elevated consumer activity online and broad-based increases in advertiser spending. We remain focused on innovating and investing in the services we offer to consumers and businesses to support our long-term growth. For example, we continue to invest in our technical infrastructure and data centers. Additionally, certain expenses continued to be lower due to the ongoing pandemic, such as advertising and promotional, and travel and entertainment. These factors, combined with the adverse impact of COVID-19 on the first quarter of 2020, positively affected year-on-year growth trends in our financial results. Further, year-on-year trends benefited from a reduction in depreciation expense due to the change in the estimated useful life of our servers and certain network equipment beginning in the first quarter of 2021; we expect the effect of this change in estimate to decline through the remainder of the year (for further details see Note 1 of the Notes to Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q). The COVID-19 pandemic continues to evolve, be unpredictable and affect our business and financial results. Our past results may not be indicative of our future performance, and historical trends in our financial results may differ materially.


See Part II Item 7, “Impact of COVID-19” in our Annual Report on Form 10-K for the year ended December 31, 2020 for more information.



Executive Overview


The following table summarizes our consolidated financial results (in millions, except for per share information and percentages).






















Three Months Ended

March 31,

2020

2021

Revenues

$41,159 

$55,314 

Increase in revenues year over year

13 

%

34 

%

Increase in constant currency revenues year over year

15 

%

32 

%

Operating income

$

7,977 

$

16,437 

Operating margin

19 

%

30 

%

Other income (expense), net

$

(220)

$

4,846 

Net Income

$

6,836 

$

17,930 

Diluted EPS

$

9.87 

$

26.29 




Total revenues were $55.3 billion, an increase of 34% year over year, primarily driven by an increase in Google Services segment revenues of $13.0 billion or 34% and an increase in Google Cloud segment






revenues of $1.3 billion or 46%. The adverse effect of COVID-19 on prior period revenues positively affected our revenue growth. Revenues from the United States, EMEA, APAC, and Other Americas were $25.0 billion, $17.0 billion, $10.5 billion, and $2.9 billion, respectively.


Total cost of revenues was $24.1 billion, an increase of 27% year over year. TAC was $9.7 billion, an increase of 30% year over year, primarily driven by an increase in revenues subject to TAC. Other cost of revenues were $14.4 billion, an increase of 25% year over year.


Operating expenses (excluding cost of revenues) were $14.8 billion, an increase of 4% year over year primarily driven by headcount growth and partially offset by a decline in our allowance for credit losses for accounts receivable.


Other information:


Operating cash flow was $19.3 billion.


Capital expenditures, which primarily included investments in technical infrastructure, were $5.9 billion.


Number of employees was 139,995 as of March 31, 2021. The majority of new hires during the quarter were engineers and product managers.



Our Segments


Beginning in the fourth quarter of 2020, we report our segment results as Google Services, Google Cloud, and Other Bets:


Google Services includes products and services such as ads, Android, Chrome, hardware, Google Maps, Google Play, Search, and YouTube. Google Services generates revenues primarily from advertising; sales of apps, in-app purchases, digital content products, and hardware; and fees received for subscription-based products such as YouTube Premium and YouTube TV.


Google Cloud includes Google’s infrastructure and data analytics platforms, collaboration tools, and other services for enterprise customers. Google Cloud generates revenues primarily from fees received for Google Cloud Platform (“GCP”) services and Google Workspace collaboration tools.


Other Bets is a combination of multiple operating segments that are not individually material. Revenues from the Other Bets are derived primarily through the sale of internet services as well as licensing and R&D services.


Unallocated corporate costs primarily include corporate initiatives, corporate shared costs, such as finance and legal, including fines and settlements, as well as costs associated with certain shared research and development activities. Additionally, hedging gains (losses) related to revenue are included in corporate costs.









Financial Results


Revenues


The following table presents our revenues by type (in millions).

















 

Three Months Ended

March 31,

 

2020

2021

Google Search & other

$

24,502 

$

31,879 

YouTube ads

4,038 

6,005 

Google Network

5,223 

6,800 

Google advertising

33,763 

44,684 

Google other

4,435 

6,494 

Google Services total

38,198 

51,178 

Google Cloud

2,777 

4,047 

Other Bets

135 

198 

Hedging gains (losses)

49 

(109)

Total revenues

$

41,159 

$

55,314 


Google Services


Google advertising revenues



Our advertising revenue growth, as well as the change in paid clicks and cost-per-click on Google Search & other properties and the change in impressions and cost-per-impression on Google Network partners’ properties (“Google Network properties”) and the correlation between these items, have been affected and may continue to be affected by various factors, including:


advertiser competition for keywords;


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 including the impact of COVID-19;


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.


Google advertising revenues consist primarily of the following:


Google Search & other consists of revenues generated on Google search properties (including revenues from traffic generated by search distribution partners who use Google.com as their default search in browsers, toolbars, etc.) and other Google owned and operated properties like Gmail, Google Maps, and Google Play;


YouTube ads consists of revenues generated on YouTube properties; and


Google Network consists of revenues generated on Google Network properties participating in AdMob, AdSense, and Google Ad Manager.






Google Search & other


Google Search & other revenues increased $7,377 million from the three months ended March 31, 2020 to the three months ended March 31, 2021. The overall growth was primarily driven by interrelated factors including increases in search queries resulting from growth in user adoption and usage, primarily on mobile devices, growth in advertiser spending, and improvements we have made in ad formats and delivery. The adverse effect of COVID-19 on prior period revenues also contributed to the year-over-year increase.


YouTube ads


YouTube ads revenues increased $1,967 million from the three months ended March 31, 2020 to the three months ended March 31, 2021. Growth was primarily driven by our direct response products followed by our brand advertising products, both of which benefited from improvements to ad formats and delivery and increased advertiser spending. The adverse effect of COVID-19 on prior period revenues also contributed to the year-over-year increase.


Google Network


Google Network revenues increased $1,577 million from the three months ended March 31, 2020 to the three months ended March 31, 2021. The growth was primarily driven by strength in AdMob and Google Ad Manager. The adverse effect of COVID-19 on prior period revenues also contributed to the year-over-year increase.


Use of Monetization Metrics


Paid clicks for our Google Search & other properties represent engagement by users and include clicks on advertisements by end-users on Google search properties and other owned and operated properties including Gmail, Google Maps, and Google Play. Historically, we included certain viewed YouTube engagement ads and the related revenues in our paid clicks and cost-per-click monetization metrics. Over time, advertising on YouTube has expanded to multiple advertising formats and the type of viewed engagement ads historically included in paid clicks and cost-per-click metrics have increasingly covered a smaller portion of YouTube advertising revenues. As a result, beginning in the fourth quarter of 2020, we removed these ads and the related revenues from the paid clicks and cost-per-click metrics. The revised metrics presented below provide a better understanding of monetization trends on the properties included within Google Search & other, as they now more closely correlate with the related changes in revenues.