ALPHABET INC.

GOOGL
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ALPHABET : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

10/30/2020 | 05:12am


Please read the following discussion and analysis of our financial condition and
results of operations together with our consolidated financial statements and
related notes included under Part I, Item 1 of this Quarterly Report on Form
10-Q.
Executive Overview of Results
Below are our key financial results for the three months ended September 30,
2020
(consolidated unless otherwise noted):
•Revenues of $46.2 billion and revenue growth of 14% year over year, constant
currency revenues growth of 15% year over year.
•Google segment revenues of $46.0 billion with revenue growth of 14% year over
year and Other Bets revenues of $178 million with revenue growth of 15% year
over year.
•Revenues from the United States, EMEA, APAC, and Other Americas were $21.4
billion
, $13.9 billion, $8.5 billion, and $2.4 billion, respectively.
•Cost of revenues was $21.1 billion, consisting of TAC of $8.2 billion and other
cost of revenues of $13.0 billion. TAC as a percentage of advertising revenues
("TAC rate") was 22.0%.
•Operating expenses (excluding cost of revenues) were $13.8 billion.
•Income from operations was $11.2 billion.
•Other income (expense), net, was a gain of $2.1 billion.
•Effective tax rate was 15.8%.
•Net income was $11.2 billion with diluted net income per share of $16.40.
•Operating cash flow was $17.0 billion.
•Capital expenditures were $5.4 billion.
•Number of employees was 132,121 as of September 30, 2020. The majority of new
hires during the quarter were engineers and product managers. By product area,
the largest headcount additions were in Google Cloud.
The Impact of COVID-19 on our Results and Operations
In late 2019, an outbreak of COVID-19 emerged and by March 11, 2020 was declared
a global pandemic by The World Health Organization. Across the United States and
the world, governments and municipalities instituted measures in an effort to
control the spread of COVID-19, including quarantines, shelter-in-place orders,
school closings, travel restrictions and the closure of non-essential
businesses. The macroeconomic impacts of COVID-19 are significant and continue
to evolve, as exhibited by, among other things, a rise in unemployment, changes
in consumer behavior, and market volatility.
We began to observe the impact of COVID-19 on our financial results late in the
quarter ended March 31, 2020. For the quarter ended June 30, 2020, our
advertising revenues declined compared to the prior year due to the continued
impacts of COVID-19 and the related reductions in global economic activity.
During the course of the quarter ended June 30, 2020, we observed a gradual
return in user search activity to more commercial topics, followed by increased
spending by our advertisers. During the quarter ended September 30, 2020, our
advertising revenues benefited from increased spending by our advertisers.
We continue to assess the realized and potential credit deterioration of our
customers due to changes in the macroeconomic environment, which has been
reflected in our allowance for credit losses for accounts receivable. We have,
and may, experience variability in our margins as many of our expenses are less
variable in nature and/or may not correlate to changes in revenues, including
costs associated with our data centers and facilities as well as employee
compensation. In addition, market volatility has contributed to fluctuations in
the valuation of our equity investments.
While we continued to make investments in land and buildings for data centers,
offices and information technology infrastructure, we have slowed the pace of
our investments, primarily as it relates to office facilities.
Looking ahead, the ongoing impact of COVID-19 on our business continues to
evolve and be unpredictable. For example, to the extent the pandemic continues
to disrupt economic activity globally we, like other businesses,
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are not immune to continued adverse impacts to our business, operations and
financial results from prolonged decreases in advertising spend, changes in user
behavior and preferences, credit deterioration and liquidity of our customers,
depressed economic activity, or volatility in capital markets. The extent of the
impact will depend on a number of factors, including the duration and severity
of the pandemic; the uneven impact to certain industries; advances in testing,
treatment and prevention; the macroeconomic impact of government measures to
contain the spread of the virus and related government stimulus measures. To
address the potential impact to our business, over the near-term, we continue to
evaluate the pace of our investment plans, including, but not limited to, our
hiring, investments in data centers, servers, network equipment, real estate and
facilities, marketing and travel spending, as well as taking certain measures to
support our customers, employees, and communities we operate in. At the same
time, we believe the current environment is accelerating digital transformation
and we remain focused on innovating and investing in the services we offer to
consumers and businesses. For example, as it relates to Google Cloud, we
continue to invest aggressively in our go-to-market capabilities, product
development and technical infrastructure to support long term growth. The
ongoing impact of COVID-19 and the extent of these measures we may implement
could have a material impact on our financial results. Our past results may not
be indicative of our future performance, and historical trends in our financial
results may differ materially.
Information about Segments
We operate our business in multiple operating segments. Google is our only
reportable segment. None of our other segments meet the quantitative thresholds
to qualify as reportable segments; therefore, the other operating segments are
combined and disclosed as Other Bets.
Our reported segments are:
•Google - Google includes our main products such as ads, Android, Chrome,
hardware, Google Cloud, Google Maps, Google Play, Search, and YouTube. Our
technical infrastructure is also included in Google. Google generates revenues
primarily from advertising; sales of apps, in-app purchases, digital content
products, and hardware; and licensing and service fees, including fees received
for Google Cloud offerings and subscription-based products.
•Other Bets - Other Bets is a combination of multiple operating segments that
are not individually material. Other Bets includes Access, Calico, CapitalG, GV,
Verily, Waymo, and X, among others. Revenues from the Other Bets are derived
primarily through the sale of internet services through Access as well as
licensing and R&D services through Verily.
Starting in the quarter ending December 31, 2020 we will disclose Google Cloud
as a separate segment.
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Revenues



The following table presents our revenues, by segment and revenue source (in
millions, unaudited). Certain amounts in prior periods have been reclassified to
conform with current period presentation:
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2020 2019 2020
Google Search & other $ 24,741 $ 26,338 $ 70,930 $ 72,159
YouTube ads(1) 3,804 5,037 10,432 12,887
Google properties 28,545 31,375 81,362 85,046



Google Network Members' properties 5,251 5,720



15,515 15,679
Google advertising 33,100% 37,095 96,877 100,725
Google Cloud 2,379 3,444 6,304 9,228
Google other(1) 4,050 5,478 11,750 15,037
Google revenues 40,225 46,017 114,931 124,990
Other Bets revenues 155 178 487 461
Hedging gains (losses) 119 (22) 364 178
Total revenues $ 40,499 $ 46,173 $ 115,782 $ 125,629


(1) YouTube non-advertising revenues are included in Google other revenues.
Google advertising revenues
In addition to the impact of COVID-19, our advertising revenue growth, as well
as the change in paid clicks and cost-per-click on Google properties and the
change in impressions and cost-per-impression on Google Network Members'
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;
•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.
The following table presents our Google advertising revenues (in millions,
unaudited):
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2020 2019 2020
Google Search & other $ 24,741 $ 26,338 $ 70,930 $ 72,159
YouTube ads(1) 3,804 5,037 10,432 12,887
Google Network Members' properties 5,251 5,720 15,515 15,679
Google advertising $ 33,100% $ 37,095 $ 96,877 $ 100,725
Google advertising revenues as a percentage of
Google segment revenues 84.0 % 80.6 % 84.3 % 80.6 %



(1) YouTube non-advertising revenues are included in Google other revenues.



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Google advertising revenues are generated on our Google properties (including
Google Search & other properties and YouTube) and Google Network Members'
properties. 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 primarily on YouTube properties; and
•Google Network Members' properties consist of revenues generated primarily on
Google Network Members' properties participating in AdMob, AdSense, and Google
Ad Manager.
Google Search & other
Our Google Search & other revenues increased $1,597 million and $1,229 million
from the three and nine months ended September 30, 2019 to the three and nine
months ended September 30, 2020, respectively. The overall growth was primarily
driven by interrelated factors including increases in search queries resulting
from ongoing growth in user adoption and usage, primarily on mobile devices,
growth in advertiser activity, and improvements we have made in ad formats and
delivery. This increase was partially offset by volatility in advertiser
spending throughout the nine months ended September 30, 2020 driven by the
impact of COVID-19.
YouTube ads
YouTube ads revenues increased $1,233 million and $2,455 million from the three
and nine months ended September 30, 2019 to the three and nine months ended
September 30, 2020, respectively. The increase was primarily driven by our
direct response advertising products, which benefited from improvements to ad
formats and delivery and increased advertiser spending. For the three months
ended September 30, 2020, growth was also driven by an increase in revenues for
our brand advertising products primarily due to increased advertiser spending.
For the nine months ended September 30, 2020, brand advertising revenues were
adversely impacted by volatility in advertiser spending driven by the impact of
COVID-19.
Google Network Members' properties
Our Google Network Members' properties revenues increased $469 million from the
three months ended September 30, 2019 to the three months ended September 30,
2020
. The increase was primarily driven by strength in both AdMob and Ad
Manager.
Our Google Network Members' properties revenues increased $164 million from the
nine months ended September 30, 2019 to the nine months ended September 30, 2020
primarily driven by an increase in revenues for AdMob. This increase was
partially offset by a decline in revenues for AdSense due to reduced advertiser
spending driven by the impact of COVID-19.
Use of Monetization Metrics
Paid clicks for our Google properties represent engagement by users and include
clicks on advertisements by end-users related to searches on Google.com and
other owned and operated properties including Gmail, Google Maps, and Google
Play; and viewed YouTube engagement ads (certain YouTube ad formats are not
included in our click or impression based metrics). Impressions for our Google
Network Members' properties include impressions displayed to users served on
Google Network Members' properties participating primarily in AdMob, AdSense and
Google Ad Manager.
Cost-per-click is defined as click-driven revenues divided by our total number
of paid clicks and represents the average amount we charge advertisers for each
engagement by users.
Cost-per-impression is defined as impression-based and click-based revenues
divided by our total number of impressions and represents the average amount we
charge advertisers for each impression displayed to users.
As our business evolves, we periodically review, refine and update our
methodologies for monitoring, gathering, and counting the number of paid clicks
on our Google properties and the number of impressions on Google Network
Members' properties and for identifying the revenues generated by click activity
on our Google properties and the revenues generated by impression activity on
Google Network Members' properties.
Google properties
The following table presents changes in our paid clicks and cost-per-click
(expressed as a percentage):
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Three Months Ended Nine Months Ended
September 30, September 30,
2019 2020 2019 2020

Paid clicks change 18 % 27 % 28 % 11 %
Cost-per-click change (2) % (15) % (11) % (8) %


The number of paid clicks through our advertising programs on Google properties
increased from the three and nine months ended September 30, 2019 to the three
and nine months ended September 30, 2020 due to an increase in paid clicks
driven by growth in views of YouTube engagement ads; an increase in clicks due
to interrelated factors, including an increase in search queries resulting from
ongoing growth in user adoption and usage, primarily on mobile devices; and
improvements we have made in ad formats and delivery. The overall positive
effect on our revenues from an increase in paid clicks was partially offset by a
decrease in the cost-per-click paid by our advertisers. The decrease in
cost-per-click was driven by continued growth in YouTube engagement ads where
cost-per-click remains lower than on our other advertising platforms. In
addition, the decrease in cost-per-click was also driven by a mix shift to less
commercial topics and reduced advertiser spending in response to COVID-19.
Google Network Members' properties
The following table presents changes in our impressions and cost-per-impression
(expressed as a percentage):
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2020 2019 2020
Impressions change 12 % 15 % 9 % 13 %



Cost-per-impression change (3) % (7) % (1) % (13) %


Impressions increased from the three and nine months ended September 30, 2019 to
the three and nine months ended September 30, 2020 primarily due to growth in
AdManager. The positive effect on our revenues from an increase in impressions
was partially offset by a decrease in the cost-per-impression paid by our
advertisers which was driven by a reduction in advertiser spending in response
to COVID-19 as well as the effect of a combination of factors including ongoing
product and policy changes and improvements we have made in ad formats and
delivery, changes in device mix, geographic mix, product mix, property mix, and
fluctuations of the U.S. dollar compared to certain foreign currencies.
Google Cloud
The following table presents our Google Cloud revenues (in millions, unaudited):
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2020 2019 2020
Google Cloud $ 2,379 $ 3,444 $ 6,304 $ 9,228
Google Cloud revenues as a percentage of Google
segment revenues 5.9 % 7.5 % 5.5 % 7.4 %


Google Cloud revenues consist primarily of revenues from Cloud offerings,
including:
•Google Cloud Platform ("GCP"), which includes infrastructure, data and
analytics, and other services;
•Google Workspace (formerly known as G Suite) productivity tools; and
•other enterprise cloud services.
Our Google Cloud revenues increased $1,065 million and $2,924 million from the
three and nine months ended September 30, 2019 to the three and nine months
ended September 30, 2020, respectively. The growth was primarily driven by our
GCP and Google Workspace offerings. Our infrastructure and our data and
analytics platform products were the largest drivers of growth in GCP.
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Google other revenues
The following table presents our Google other revenues (in millions, unaudited):
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2020 2019 2020
Google other $ 4,050 $ 5,478 $ 11,750 $ 15,037
Google other revenues as a percentage of Google
segment revenues 10.1 % 11.9 % 10.2 % 12.0 %


Google other revenues consist primarily of revenues from:
•Google Play, which includes revenues from sales of apps and in-app purchases
(which we recognize net of payout to developers) and digital content sold in the
Google Play store;
•hardware, including Google Nest home products, Pixelbooks, Pixel phones and
other devices;
•YouTube non-advertising, including YouTube Premium and YouTube TV subscriptions
and other services; and
•other products and services.
Our Google other revenues increased $1,428 million and $3,287 million from the
three and nine months ended September 30, 2019 to the three and nine months
ended September 30, 2020, respectively. The growth was primarily driven by
Google Play and YouTube subscriptions. Growth for Google Play was primarily
driven by sales of apps and in-app purchases, which benefited from elevated user
engagement partially due to the impact of COVID-19, and growth for YouTube
subscriptions was primarily driven by an increase in paid subscribers.
Over time, our growth rate for Google Cloud and Google other revenues may be
affected by the seasonality associated with new product and service launches, as
well as market dynamics.
Other Bets
The following table presents our Other Bets revenues (in millions, unaudited):
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2020 2019 2020
Other Bets revenues $ 155 $ 178 $ 487 $ 461
Other Bets revenues as a percentage of total
revenues 0.4 % 0.4 % 0.4 % 0.4 %



Other Bets revenues consist primarily of revenues from the sale of Access
internet services and Verily licensing and R&D services.
Revenues by Geography
The following table presents our revenues by geography as a percentage of
revenues, determined based on the addresses of our customers (unaudited):



Three Months Ended Nine Months Ended
September 30, September 30,
2019 2020 2019 2020
United States 46 % 47 % 46 % 47 %
EMEA 31 % 30 % 32 % 30 %
APAC 17 % 18 % 17 % 18 %
Other Americas 6 % 5 % 5 % 5 %


For further details on revenues by geography, see Note 2 of the Notes to
Consolidated Financial Statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q.
Use of Constant Currency Revenues and Constant Currency Revenue Percentage
Change
The effect of currency exchange rates on our business is an important factor in
understanding period to period comparisons. Our international revenues are
favorably affected as the U.S. dollar weakens relative to other foreign
currencies, and unfavorably affected as the U.S. dollar strengthens relative to
other foreign currencies. Our revenues are also favorably affected by net
hedging gains and unfavorably affected by net hedging losses.
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We use non-GAAP constant currency revenues and non-GAAP percentage change in
constant currency revenues for financial and operational decision-making and as
a means to evaluate period-to-period comparisons. We believe the presentation of
results on a constant currency basis in addition to GAAP results helps improve
the ability to understand our performance because they exclude the effects of
foreign currency volatility that are not indicative of our core operating
results.
Constant currency information compares results between periods as if exchange
rates had remained constant period over period. We define constant currency
revenues as total revenues excluding the effect of foreign exchange rate
movements and hedging activities, and use it to determine the constant currency
revenue percentage change on a year-on-year basis. Constant currency revenues
are calculated by translating current period revenues using prior period
exchange rates, as well as excluding any hedging effects realized in the current
period.
Constant currency revenue percentage change is calculated by determining the
change in period revenues over prior period revenues where current period
foreign currency revenues are translated using prior period exchange rates and
hedging effects are excluded from revenues of both periods.
These results should be considered in addition to, not as a substitute for,
results reported in accordance with GAAP. Results on a constant currency basis,
as we present them, may not be comparable to similarly titled measures used by
other companies and are not a measure of performance presented in accordance
with GAAP.
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The following table presents the foreign exchange effect on our international
revenues and total revenues (in millions, except percentages, unaudited):



Three Months Ended Nine Months Ended
September 30, September 30,
2019 2020 2019 2020
EMEA revenues $ 12,565 $ 13,924 $ 36,546 $ 38,132
Exclude foreign exchange effect on current
period revenues using prior year rates 456 (250) 2,034 346
EMEA constant currency revenues $ 13,021 $ 13,674 $ 38,580 $ 38,478
Prior period EMEA revenues $ 10,909 $ 12,565 $ 32,488 $ 36,546
EMEA revenue percentage change 15 % 11 % 12 % 4 %
EMEA constant currency revenue percentage change 19 % 9 % 19 % 5 %

APAC revenues $ 6,814 $ 8,458 $ 19,446 $ 22,641
Exclude foreign exchange effect on current
period revenues using prior year rates 17 1 433 167
APAC constant currency revenues $ 6,831 $ 8,459 $ 19,879 $ 22,808
Prior period APAC revenues $ 5,401 $ 6,814 $ 15,310 $ 19,446
APAC revenue percentage change 26 % 24 % 27 % 16 %
APAC constant currency revenue percentage change 26 % 24 % 30 % 17 %

Other Americas revenues $ 2,290 $ 2,371 $ 6,320 $ 6,367
Exclude foreign exchange effect on current
period revenues using prior year rates 66 304 442 640


Other Americas constant currency revenues $ 2,356 $ 2,675


$ 6,762 $ 7,007
Prior period Other Americas revenues $ 1,827 $ 2,290 $ 5,407 $ 6,320
Other Americas revenue percentage change 25 % 4 % 17 % 1 %
Other Americas constant currency revenue
percentage change 29 % 17 % 25 % 11 %

United States revenues $ 18,711 $ 21,442 $ 53,106 $ 58,311
United States revenue percentage change 21 % 15 % 19 % 10 %

Hedging gains (losses) $ 119 $ (22) $ 364 $ 178
Total revenues $ 40,499 $ 46,173 $ 115,782 $ 125,629
Total constant currency revenues $ 40,919 $ 46,250 $ 118,327 $ 126,604
Prior period revenues, excluding hedging
effect(1) $ 33,660 $ 40,380 $ 97,805 $ 115,418
Total revenue percentage change 20 % 14 % 19 % 9 %
Total constant currency revenue percentage
change 22 % 15 % 21 % 10 %


(1) Total revenues and hedging (losses) were $33,740 million and $80 million
for the three months ended September 30, 2018, respectively, and $97,543 million
and $(262) million for the nine months ended September 30, 2018, respectively.
Our EMEA revenue percentage change from the three months ended September 30,
2019
to the three months ended September 30, 2020 was favorably affected by
changes in foreign currency exchange rates, primarily due to the U.S. dollar
weakening relative to the Euro and British pound, partially offset by the U.S.
dollar strengthening relative to the Turkish lira. Our EMEA revenue percentage
change from the nine months ended September 30, 2019 to the nine months ended
September 30, 2020 was unfavorably affected by changes in foreign currency
exchange rates, primarily due to the U.S. dollar strengthening relative to the
Turkish lira and Euro.
Our APAC revenue percentage change from the three months ended September 30,
2019
to the three months ended September 30, 2020 was not materially affected by
foreign currency exchange rates. Our APAC revenue percentage change from the
nine months ended September 30, 2019 to the nine months ended September 30,
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2020 was unfavorably affected by changes in foreign currency exchange rates
primarily due to the U.S. dollar strengthening relative to Australian dollar and
South Korean won, partially offset by the U.S. dollar weakening relative to the
Japanese yen.
Our Other Americas revenue percentage change from the three and nine months
ended September 30, 2019 to the three and nine months ended September 30, 2020
was unfavorably affected by changes in foreign currency exchange rates,
primarily due to the U.S. dollar strengthening relative to the Brazilian real.
Costs and Expenses
Cost of Revenues
Cost of revenues consists of TAC which are paid to Google Network Members
primarily for ads displayed on their properties and amounts paid to our
distribution partners who make available our search access points and services.
Our distribution partners include browser providers, mobile carriers, original
equipment manufacturers, and software developers.
The cost of revenues as a percentage of revenues generated from ads placed on
Google Network Members' properties are significantly higher than the cost of
revenues as a percentage of revenues generated from ads placed on Google
properties because most of the advertiser revenues from ads served on Google
Network Members' properties are paid as TAC to our Google Network Members.
Additionally, other cost of revenues (which is the cost of revenues excluding
TAC) includes the following:
•Content acquisition costs primarily related to payments to content providers
from whom we license video and other content for distribution on YouTube
advertising and subscription services and Google Play (we pay fees to these
content providers based on revenues generated or a flat fee);
•Expenses associated with our data centers (including bandwidth, compensation
expenses (including SBC), depreciation, energy, and other equipment costs) as
well as other operations costs (such as content review and customer support
costs). These costs are generally less variable in nature and may not correlate
with related changes in revenues; and
•Inventory related costs for hardware we sell.
The following tables present our cost of revenues, including TAC (in millions,
unaudited):
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2020 2019 2020
TAC $ 7,490 $ 8,166 $ 21,588 $ 22,312
Other cost of revenues 10,078 12,951 29,288 36,340
Total cost of revenues $ 17,568 $ 21,117 $ 50,876 $ 58,652
Total cost of revenues as a percentage of
revenues 43.4 % 45.7 % 43.9 % 46.7 %


Cost of revenues increased $3,549 million from the three months ended September
30, 2019
to the three months ended September 30, 2020. The increase was due to
increases in other cost of revenues of $2,873 million and TAC of $676 million.
Cost of revenues increased $7,776 million from the nine months ended September
30, 2019
to the nine months ended September 30, 2020. The increase was due to
increases in other cost of revenues of $7,052 million and TAC of $724 million.
The increase in other cost of revenues from the three and nine months ended
September 30, 2019 to the three and nine months ended September 30, 2020 was due
to an increase in data center and other operations costs and an increase in
content acquisition costs primarily for YouTube consistent with the growth in
YouTube revenues. This increase was partially offset by a decline in hardware
costs for the nine months ended September 30, 2020.
TAC increased from the three months ended September 30, 2019 to the three months
ended September 30, 2020 due to increases in TAC paid to distribution partners
and to Google Network Members, primarily driven by an increase in revenues
subject to TAC.
The TAC rate decreased from 22.2% to 22.0% from the three months ended September
30, 2019
to the three months ended September 30, 2020 primarily due to the
favorable revenue mix shift from Google Network Members' properties to Google
properties. The TAC rate on Google properties revenues and the TAC rate on
Google Network revenues were both substantially consistent from the three months
ended September 30, 2019 to the three months ended September 30, 2020.
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TAC increased from the nine months ended September 30, 2019 to the nine months
ended September 30, 2020 due to increases in TAC paid to distribution partners
and to Google Network Members. The increase in TAC paid to distribution partners
was due to both an increase in revenues subject to TAC and the ongoing shift to
mobile, which carries higher TAC because more mobile searches are channeled
through paid access points. The increase in TAC paid to Google Network Members
was primarily due to an increase in revenues subject to TAC.
The TAC rate decreased from 22.3% to 22.2% from the nine months ended September
30, 2019
to the nine months ended September 30, 2020 primarily due to the
favorable revenue mix shift from Google Network Members' properties to Google
properties. The TAC rate on Google properties revenues and the TAC rate on
Google Network revenues were both substantially consistent from the nine months
ended September 30, 2019 to the nine months ended September 30, 2020.
Over time, cost of revenues as a percentage of total revenues may be affected by
a number of factors, including the following:
•The amount of TAC paid to Google Network Members, which is affected by a
combination of factors such as geographic mix, product mix, revenue share terms,
and fluctuations of the U.S. dollar compared to certain foreign currencies;
•The amount of TAC paid to distribution partners, which is affected by changes
in device mix, geographic mix, partner mix, partner agreement terms such as
revenue share arrangements, and the percentage of queries channeled through paid
access points;
•Relative revenue growth rates of Google properties and Google Network Members'
properties;
•Certain costs that are less variable in nature and may not correlate with the
related revenues;
•Costs associated with our data centers and other operations to support ads,
Google Cloud, Search and YouTube and other products;
•Content acquisition costs, which are primarily affected by the relative growth
rates in our YouTube advertising and subscription revenues;
•Costs related to hardware sales; and
•Increased proportion of non-advertising revenues, which generally have higher
costs of revenues, relative to our advertising revenues.
Research and Development
The following table presents our R&D expenses (in millions, unaudited):
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2020 2019 2020
Research and development expenses $ 6,554 $ 6,856 $ 18,100% $ 20,551
Research and development expenses as a percentage
of revenues 16.2 % 14.8 % 16.2 % 16.4 %


R&D expenses consist primarily of:
•Compensation expenses (including SBC) and facilities-related costs for
engineering and technical employees responsible for R&D of our existing and new
products and services;
•Depreciation expenses;
•Equipment-related expenses; and
•Professional services fees primarily related to consulting and outsourcing
services.
R&D expenses increased $302 million from the three months ended September 30,
2019
to the three months ended September 30, 2020. The increase was primarily
due to an increase in compensation expenses (including SBC) and
facilities-related costs of $439 million, largely resulting from a 10% increase
in headcount. This increase was partially offset by a decrease in travel and
entertainment expenses of $122 million.
R&D expenses increased $1,755 million from the nine months ended September 30,
2019
to the nine months ended September 30, 2020. The increase was primarily due
to an increase in compensation expenses (including SBC) and facilities-related
costs of $1,815 million, largely resulting from a 13% increase in headcount.
This increase was partially offset by a decrease in travel and entertainment
expenses of $261 million.
Over time, R&D expenses as a percentage of revenues may fluctuate due to certain
expenses that are generally less variable in nature and may not correlate to the
changes in revenues. In addition, R&D expenses may be affected by a number of
factors including continued investment in ads, Android, Chrome, Google Cloud,
Google Play, hardware, machine learning, Other Bets, Search and YouTube.
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Sales and Marketing
The following table presents our sales and marketing expenses (in millions,
unaudited):
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2020 2019 2020
Sales and marketing expenses $ 4,609 $ 4,231 $ 12,726 $ 12,632
Sales and marketing expenses as a percentage of
revenues 11.4 % 9.2 % 11.0 % 10.1 %


Sales and marketing expenses consist primarily of:
•Advertising and promotional expenditures related to our products and services;
and
•Compensation expenses (including SBC) and facilities-related costs for
employees engaged in sales and marketing, sales support, and certain customer
service functions.
Sales and marketing expenses decreased $378 million from the three months ended
September 30, 2019 to the three months ended September 30, 2020. The decrease
was primarily due to a decrease in advertising and promotional expenses of $299
million
driven by reduced spending and a decrease in travel and entertainment
expenses of $136 million. This decrease was partially offset by an increase in
compensation expenses (including SBC) and facilities-related costs of $157
million
, largely resulting from a 7% increase in headcount.
Sales and marketing expenses decreased $94 million from the nine months ended
September 30, 2019 to the nine months ended September 30, 2020. The decrease was
primarily due to a decrease in advertising and promotional expenses of $718
million
, as we reduced spending and paused or rescheduled campaigns and changed
some events to digital-only formats as a result of COVID-19, and a decrease in
travel and entertainment expenses of $234 million. This decrease was partially
offset by an increase in compensation expenses (including SBC) and
facilities-related costs of $890 million, largely resulting from an 8% increase
in headcount.
Over time, sales and marketing expenses as a percentage of revenues may
fluctuate due to certain expenses that are generally less variable in nature and
may not correlate to the changes in revenues. In addition, sales and marketing
expenses may be affected by a number of factors including the seasonality
associated with new product and service launches and strategic decisions
regarding the timing and extent of our spending.
General and Administrative
The following table presents our general and administrative expenses (in
millions, unaudited):
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2020 2019 2020
General and administrative expenses $ 2,591 $


2,756 $ 6,722 $ 8,221
General and administrative expenses as a percentage
of revenues


6.4 % 6.0 % 5.8 % 6.5 %


General and administrative expenses consist primarily of:
•Compensation expenses (including SBC) and facilities-related costs for
employees in our finance, human resources, information technology, and legal
organizations;
•Depreciation;
•Equipment-related expenses;
•Legal-related expenses; and
•Professional services fees primarily related to audit, information technology
consulting, outside legal, and outsourcing services.
General and administrative expenses increased $165 million from the three months
ended September 30, 2019 to the three months ended September 30, 2020. The
increase was primarily due to an increase in compensation expenses (including
SBC) and facilities-related costs of $335 million, largely resulting from a 15%
increase in headcount. The increase was partially offset by a $554 million
charge recognized in the prior year period relating to a legal settlement.
General and administrative expenses increased $1,499 million from the nine
months ended September 30, 2019 to the nine months ended September 30, 2020. The
increase was primarily due to an increase in compensation expenses (including
SBC) and facilities-related costs of $873 million, largely resulting from a 17%
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increase in headcount. In addition, there was an increase of $545 million
related to allowance for credit losses for accounts receivable primarily due to
the impact of COVID-19 and an increase of $282 million in non-income tax-related
items. The increase was partially offset by a $554 million charge recognized in
the prior year period relating to a legal settlement.
Over time, general and administrative expenses as a percentage of revenues may
fluctuate due to certain expenses that are generally less variable in nature and
may not correlate to the changes in revenues, the effect of discrete items such
as legal settlements, or further allowances for credit losses for accounts
receivable associated with the impact of COVID-19.
European Commission Fines
In March 2019, the EC announced its decision that certain contractual provisions
in agreements that Google had with AdSense for Search partners infringed
European competition law. The EC decision imposed a €1.5 billion ($1.7 billion
as of March 20, 2019) fine, which was accrued in the first quarter of 2019.
Please refer to Note 10 of the Notes to Consolidated Financial Statements
included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for further
information.
Other Income (Expense), Net
The following table presents other income (expense), net (in millions,
unaudited):
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2020 2019 2020



Other income (expense), net $ (549) $ 2,146 $ 3,956 $ 3,820





Other income (expense), net, increased $2,695 million from the three months
ended September 30, 2019 to the three months ended September 30, 2020. The
change was primarily driven by increases in unrealized gains on equity
securities, partially offset by an increase in accrued performance fees.
Other income (expense), net, decreased $136 million from the nine months ended
September 30, 2019 to the nine months ended September 30, 2020. The change was
primarily driven by a decrease in interest income and an increase in foreign
currency exchange loss, partially offset by an increase in gains on debt
securities.
Over time, other income (expense), net, may be affected by market dynamics and
other factors. Equity values generally change daily for marketable equity
securities and upon the occurrence of observable price changes or upon
impairment of non-marketable equity securities. In addition, volatility in the
global economic climate and financial markets, including the effects of
COVID-19, could result in a significant change in the value of our investments.
Fluctuations in the value of these investments has, and we expect will continue
to, contribute to volatility of OI&E in future periods. For additional
information about our investments, see Note 3 of the Notes to Consolidated
Financial Statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q.
Provision for Income Taxes
The following table presents our provision for income taxes (in millions, except
for effective tax rate; unaudited):
Three Months Ended Nine Months Ended
September 30, September 30,
2019 2020 2019 2020
Provision for income taxes $ 1,560 $ 2,112 $ 5,249 $ 4,351
Effective tax rate 18.1 % 15.8 % 18.1 % 14.8 %


Our effective tax rate decreased 2.3% from the three months ended September 30,
2019
to the three months ended September 30, 2020. The decrease in effective tax
rate is primarily due to an increase in the U.S. federal Foreign-Derived
Intangible Income tax benefit, and a decrease in unrecognized tax benefits in
2020 as compared to 2019, partially offset by higher earnings in countries that
have higher statutory rates resulting from the change in our corporate legal
entity structure implemented as of December 31, 2019.
Our effective tax rate decreased 3.3% from the nine months ended September 30,
2019
to the nine months ended September 30, 2020. The decrease in effective tax
rate is primarily due to an increase in the U.S. federal Foreign-Derived
Intangible Income tax benefit, an increase in the stock-based compensation
related tax benefits including the reversal of the Altera tax benefit as a
result of the U.S. Court of Appeals decision in 2019, and the non-
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deductible EC fine in 2019, both of which did not recur in 2020, partially
offset by higher earnings in countries that have higher statutory rates,
resulting from the change in our corporate legal entity structure implemented as
of December 31, 2019.
Our effective tax rate is based on forecasted annual results which may fluctuate
through the rest of the year, in particular due to COVID-19. As such, evolving
facts and circumstances surrounding these forecasts could result in the
application of different provisions of tax laws and cause our estimated annual
effective tax rate to change significantly through the remainder of the year.
In addition, our future effective tax rate may be affected by changes in the
geographic mix of earnings in countries with different statutory rates, the
valuation of our deferred tax assets or liabilities, or changes in tax laws,
regulations, or accounting principles, as well as certain discrete items.
Capital Resources and Liquidity
As of September 30, 2020, we had $132.6 billion in cash, cash equivalents, and
marketable securities. Cash equivalents and marketable securities are comprised
of time deposits, money market funds, highly liquid government bonds, corporate
debt securities, mortgage-backed and asset-backed securities and marketable
equity securities.
As of September 30, 2020, we had long-term taxes payable of $6.5 billion related
to a one-time transition tax payable incurred as a result of the U.S. Tax Cuts
and Jobs Act ("Tax Act"). As permitted by the Tax Act, we will pay the
transition tax in annual interest-free installments through 2025.
In 2017, 2018 and 2019, the EC announced decisions that certain actions taken by
Google infringed European competition law and imposed fines of €2.4 billion
($2.7 billion as of June 27, 2017), €4.3 billion ($5.1 billion as of June 30,
2018
), and €1.5 billion ($1.7 billion as of March 20, 2019), respectively. While
each EC decision is under appeal, we included the fines in accrued expenses and
other current liabilities on our Consolidated Balance Sheets as we provided bank
guarantees (in lieu of a cash payment) for the fines.
In November 2019, we entered into an agreement to acquire Fitbit, a leading
wearables brand, for $7.35 per share, representing a total purchase price of
approximately $2.1 billion as of the date of the agreement. While we still
expect to secure the necessary regulatory approvals and to close the transaction
in 2020, the time frame may extend beyond that.
In July 2020, we entered into an agreement to invest approximately INR 33,737
crore
($4.5 billion as of July 15, 2020) in Jio Platforms Ltd. for a 7.7% stake
in the company. This agreement is subject to regulatory review in India and is
expected to be completed later this year.
Our principal sources of liquidity are our cash, cash equivalents, and
marketable securities, as well as the cash flow that we generate from our
operations. The primary use of capital continues to be to invest for the long
term growth of the business. We regularly evaluate our cash and capital
structure, including the size, pace and form of capital return to stockholders.
We have a short-term debt financing program of up to $5.0 billion through the
issuance of commercial paper. Net proceeds from this program are used for
general corporate purposes. As of September 30, 2020, we had no commercial paper
outstanding. As of September 30, 2020, we have $4.0 billion of revolving credit
facilities expiring in July 2023 with no amounts outstanding. The interest rate
for the credit facilities is determined based on a formula using certain market
rates. We believe that our sources of funding will be sufficient to satisfy our
currently anticipated cash requirements including capital expenditures, working
capital requirements, potential acquisitions, and other liquidity requirements
through at least the next 12 months.
In August 2020, we issued $10.0 billion of fixed-rate senior unsecured notes in
six tranches: $1.0 billion due in 2025, $1.0 billion due in 2027, $2.25 billion
due in 2030, $1.25 billion due in 2040, $2.5 billion due in 2050 and
$2.0 billion due in 2060. The 2020 Notes had a weighted average duration of 21.5
years and weighted average coupon rate of 1.57%. Of the total issuance,
$5.75 billion was designated as Sustainability Bonds, the net proceeds of which
are used to fund environmentally and socially responsible projects in the
following eight areas: energy efficiency, clean energy, green buildings, clean
transportation, circular economy and design, affordable housing, commitment to
racial equity, and support for small business and COVID-19 crisis response. The
remaining net proceeds are used for general corporate purposes. As of
September 30, 2020, we have senior unsecured notes outstanding with a total
carrying value of $13.8 billion. Refer to Note 6 of the Notes to Consolidated
Financial Statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q for further information on the debts.
In July 2019, the Board of Directors of Alphabet authorized the company to
repurchase up to $25.0 billion of its Class C capital stock, which was completed
during the third quarter of 2020. In July 2020, the Board of Directors of
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Alphabet authorized the company to repurchase up to an additional $28.0 billion
of its Class C capital stock. As of September 30, 2020, $25.5 billion remains
available for repurchase. The repurchases are being executed from time to time,
subject to general business and market conditions and other investment
opportunities, through open market purchases or privately negotiated
transactions, including through Rule 10b5-1 plans. The repurchase program does
not have an expiration date. Refer to Note 11 of the Notes to Consolidated
Financial Statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q.
During
the nine months ended September 30, 2020 we spent $16.8 billion on
capital expenditures and recognized total operating lease assets of $2.2
billion
. As of September 30, 2020, the amount of total future lease payments
under operating leases, which had a weighted average remaining lease term of 9
years, was $14.9 billion. Finance leases were not material for the nine months
ended September 30, 2020. Refer to Note 4 of the Notes to Consolidated Financial
Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for
further information on the leases.
The following table presents our cash flows (in millions, unaudited):
Nine Months Ended
September 30,
2019 2020


Net cash provided by operating activities $ 40,093 $ 42,
Net cash used in investing activities $ (24,788) $ (25,492)
Net cash used in financing activities $ (15,883) $ (15,138)





Cash Provided by Operating Activities
Our largest source of cash provided by our operations are advertising revenues
generated by Google properties and Google Network Members' properties.
Additionally, we generate cash through sales of apps, in-app purchases, digital
content products, and hardware; and licensing and service fees including fees
received for Google Cloud offerings and subscription-based products.
Our primary uses of cash from our operating activities include payments to our
Google Network Members and distribution partners, and payments for content
acquisition costs. In addition, uses of cash from operating activities include
compensation and related costs, hardware inventory costs, other general
corporate expenditures, and income taxes.
Net cash provided by operating activities increased from the nine months ended
September 30, 2019 to the nine months ended September 30, 2020 primarily due to
the net impact of increases in cash received from revenues and cash paid for
cost of revenues and operating expenses, and changes in operating assets and
liabilities.
Cash Used in Investing Activities
Cash provided by investing activities consists primarily of maturities and sales
of our investments in marketable and non-marketable securities. Cash used in
investing activities consists primarily of purchases of property and equipment,
which primarily includes our investments in land and buildings for data centers,
offices and information technology infrastructure to provide capacity for the
growth of our businesses; purchases of marketable and non-marketable securities;
and payments for acquisitions.
Net cash used in investing activities increased from the nine months ended
September 30, 2019 to the nine months ended September 30, 2020 primarily due to
an increase in purchases of marketable securities, partially offset by a net
increase in maturities and sales of marketable securities.
Cash Used in Financing Activities
Cash provided by financing activities consists primarily of proceeds from
issuance of debt and proceeds from the sale of interest in consolidated
entities. Cash used in financing activities consists primarily of net payments
related to stock-based award activities, repurchases of capital stock, and
repayments of debt.
Net cash used in financing activities decreased from the nine months ended
September 30, 2019 to the nine months ended September 30, 2020 primarily due to
increases in proceeds from issuance of debt and proceeds from the sale of
interest in consolidated entities, partially offset by an increase in cash
payments for repurchases of capital stock.
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Critical Accounting Policies and Estimates
See Part II, Item 7, "Critical Accounting Policies and Estimates" in our Annual
Report on Form 10-K for the year ended December 31, 2019. There have been no
material changes to our critical accounting policies and estimates since our
Annual Report on Form 10-K for the year ended December 31, 2019, certain of
which are further described below.
As of September 30, 2020 the impact of COVID-19 continues to unfold and as a
result, certain of our estimates and assumptions require increased judgment and
carry a higher degree of variability and volatility that could result in
material changes to our estimates in future periods.
Income Taxes
We are subject to income taxes in the U.S. and foreign jurisdictions.
Significant judgment is required in evaluating our uncertain tax positions and
determining our provision for income taxes. Our interim tax accruals are based
on an estimated annual effective tax rate applied to year-to-date income along
with certain discrete items recorded in the period. Estimates of the annual
effective tax rate at the end of an interim period are based on our best
estimate of future events and transactions which, as a result of COVID-19, may
be impacted by a higher degree of variability and volatility. As such, evolving
facts and circumstances surrounding these forecasts could result in the
application of different provisions of tax laws and cause our estimated annual
effective tax rate to change significantly through the remainder of the year.
Although we believe we have adequately reserved for our uncertain tax positions,
no assurance can be given that the final tax outcome of these matters will not
be different. We adjust these reserves in light of changing facts and
circumstances, such as the closing of a tax audit or the refinement of an
estimate. To the extent that the final tax outcome of these matters is different
than the amounts recorded, such differences will affect the provision for income
taxes and the effective tax rate in the period in which such determination is
made.
The provision for income taxes includes the effect of reserve provisions and
changes to reserves that are considered appropriate as well as the related net
interest and penalties. In addition, we are subject to the continuous
examination of our income tax returns by the Internal Revenue Service ("IRS")
and other tax authorities which may assert assessments against us. We regularly
assess the likelihood of adverse outcomes resulting from these examinations and
assessments to determine the adequacy of our provision for income taxes.
Available Information
Our website is located at www.abc.xyz, and our investor relations website is
located at www.abc.xyz/investor. Our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, and our Proxy Statements, and
any amendments to these reports, are available through our investor relations
website, free of charge, after we file them with the SEC. We also provide a link
to the section of the SEC's website at www.sec.gov that has all of the reports
that we file or furnish with the SEC.
We webcast via our investor relations website our earnings calls and certain
events we participate in or host with members of the investment community. Our
investor relations website also provides notifications of news or announcements
regarding our financial performance and other items of interest to our
investors, including SEC filings, investor events, press and earnings releases,
and blogs. We also share Google news and product updates on Google's Keyword
blog at https://www.blog.google/, which may be of interest or material to our
investors. Further, corporate governance information, including our certificate
of incorporation, bylaws, governance guidelines, board committee charters, and
code of conduct, is also available on our investor relations website under the
heading "Other." The content of our websites are not incorporated by reference
into this Quarterly Report on Form 10-Q or in any other report or document we
file with the SEC, and any references to our websites are intended to be
inactive textual references only.

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