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Alphabet Announces Second Quarter 2018 ResultsMOUNTAIN VIEW, Calif. July 23, 2018 Alphabet Inc. (NASDAQ: GOOG, GOOGL) today announced financialresults for the quarter ended June 30, 2018.“We delivered another quarter of very strong performance, with revenues of $32.7 billion, up 26% versus the secondquarter of 2017 and 23% on a constant currency basis. Our investments are driving great experiences for users, strongresults for advertisers, and new business opportunities for Google and Alphabet,“ said Ruth Porat, CFO of Alphabetand Google.Q2 2018 financial highlightsThe table below provides summary data to facilitate comparison of current quarter performance to prior periods giventhe announcement on July 18, 2018 by the European Commission (EC) of its decision that certain contractual provisionsin agreements between Google and Android partners infringed European competition law and the associated 4.34billion ($5.07 billion as of June 30, 2018) fine. The table includes the effect of the EC fines accrued in Q2 2017 andQ2 2018.Summary resultsThree Months Ended June 30,Including Fines (GAAP) Excluding Fines2017 2018 2017 2018Revenues $26,010 $32,657 $26,010 $32,657Operating income $4,132 $2,807 $6,868 $7,878Operating margin 16% 9% 26% 24%Net income $3,524 $3,195 $6,260 $8,266Diluted EPS $5.01 $4.54 $8.90 $11.75The following presents a summary of our consolidated financial results for the quarters ended June 30, 2017 and 2018(in millions, except for per share information, percentages, and number of employees; unaudited) reported on a GAAPbasis and includes the effects of the EC fines as well as gains on equity securities.Three Months EndedJune 30, 2017Three Months EndedJune 30, 2018Revenues $26,010 $32,657Increase in revenues year over year 21% 26%Increase in constant currency revenues year over year 23% 23%Operating income $4,132 $2,807Operating margin 16% 9%OI unaudited)Segment revenues and operating resultsThree Months EndedJune 30, 2017Three Months EndedJune 30, 2018Google properties revenues $18,425 $23,262Google Network Members properties revenues 4,247 4,825Google advertising revenues 22,672 28,087Google other revenues 3,241 4,425Google segment revenues $25,913 $32,512Other Bets revenues $97 $145Google operating income* $7,664 $8,959Other Bets operating loss ($633) ($732)*The EC fines are included in reconciling items for the three months ended June 30, 2017 and June 30, 2018, respectively, as theyare not allocated to Google for segment reporting purposes.Traffic acquisition costs (TAC) to Google Network Members and distribution partnersThree Months EndedJune 30, 2017Three Months EndedJune 30, 2018TAC to Google Network Members $3,042 $3,411TAC to Google Network Members as % of Google NetworkMembers properties revenues 72% 71%TAC to distribution partners $2,049 $3,009TAC to distribution partners as % of Google properties revenues 11% 13%Total TAC $5,091 $6,420Total TAC as % of Google advertising revenues 22% 23%Monetization metrics informationChange from Q22017 to Q2 2018(YoY)Change from Q12018 to Q2 2018(QoQ)Paid clicks on Google properties 58 % 15 %Cost-per-click on Google properties (22)% (10)%Impressions on Google Network Members properties 1 % (4)%Cost-per-impression on Google Network Members properties 14 % 7 %Q2 2018 impact from equity securitiesThe following summarizes the effects on our Q2 2018 results of an accounting standard (ASU 2016-01) adopted onJanuary 1, 2018 that changed the way companies are required to account for equity security investments. Specifically,all gains and losses, unrealized and realized, on equity security investments must be recognized in OI operating margin,excluding the EC fines; net income, excluding the EC fines; diluted earnings per share, excluding the EC fines; freecash flow; constant currency revenues; and constant currency revenue growth. The presentation of this financialinformation is not intended to be considered in isolation or as a substitute for, or superior to, the financial informationprepared and presented in accordance with GAAP.We use these non-GAAP financial measures for financial and operational decision-making and as a means to evaluateperiod-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplementalinformation regarding our performance and liquidity by excluding certain items that may not be indicative of our recurringcore business operating results, such as our revenues excluding the impact of foreign exchange rate movements andhedging activities or our operating performance excluding extraordinary fines. We believe that both management andinvestors benefit from referring to these non-GAAP financial measures in assessing our performance and whenplanning, forecasting, and analyzing future periods. These non-GAAP financial measures also facilitate managementsinternal comparisons to our historical performance and liquidity as well as comparisons to our competitors operatingresults. We believe these non-GAAP financial measures are useful to investors both because (1) they allow for greatertransparency with respect to key metrics used by management in its financial and operational decision-making and(2) they are used by our institutional investors and the analyst community to help them analyze the health of ourbusiness.There are a number of limitations related to the use of non-GAAP financial measures. We compensate for theselimitations by providing specific information regarding the GAAP amounts excluded from these non-GAAP financialmeasures and evaluating these non-GAAP financial measures together with their relevant financial measures inaccordance with GAAP.For more information on these non-GAAP financial measures, please see the tables captioned “Reconciliations ofnon-GAAP results of operations to the nearest comparable GAAP measures,“ “Reconciliation from net cash providedby operating activities to free cash flow,“ and “Reconciliation from GAAP revenues to non-GAAP constant currencyrevenues“ included at the end of this release.ContactInvestor relations Mediainvestor-relationsabc pressabcAlphabet Inc.CONSOLIDATED BALANCE SHEETS(In millions, except share amounts which are reflected in thousands and par value per share amounts)December 31,2017June 30,2018(unaudited)AssetsCurrent assets:Cash and cash equivalents $ 10,715 $ 14,148Marketable securities 91,156 88,106Total cash, cash equivalents, and marketable securities 101,871 102,254Accounts receivable, net of allowance of $674 and $630 18,336 17,043Income taxes receivable, net 369 201Inventory 749 698Other current assets 2,983 3,961Total current assets 124,308 124,157Non-marketable investments 7,813 11,487Deferred income taxes 680 685Property and equipment, net 42,383 51,672Intangible assets, net 2,692 2,662Goodwill 16,747 17,895Other non-current assets 2,672 3,052Total assets $ 197,295 $ 211,610Liabilities and Stockholders EquityCurrent liabilities:Accounts payable $ 3,137 $ 3,369Accrued compensation and benefits 4,581 4,642Accrued expenses and other current liabilities 10,177 15,261Accrued revenue share 3,975 3,728Deferred revenue 1,432 1,714Income taxes payable, net 881 1,189Total current liabilities 24,183 29,903Long-term debt 3,969 3,981Deferred revenue, non-current 340 358Income taxes payable, non-current 12,812 11,652Deferred income taxes 430 479Other long-term liabilities 3,059 3,237Total liabilities 44,793 49,610Commitments and contingenciesStockholders equity:Convertible preferred stock, $0.001 par value per share, 100,000 shares authorized; noshares issued and outstanding 0 0Class A and Class B common stock, and Class C capital stock and additional paid-incapital, $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); 694,783 (Class A 298,470, Class B 46,972,Class C 349,341) and 695,946 (Class A 298,895, Class B 46,891, Class C 350,160)shares issued and outstanding 40,247 42,243Accumulated other comprehensive loss (992) (1,525)Retained earnings 113,247 121,282Total stockholders equity 152,502 162,000Total liabilities and stockholders equity $ 197,295 $ 211,610Alphabet Inc.CONSOLIDATED STATEMENTS OF INCOME(In millions, except per share amounts; unaudited)Three Months Ended Six Months EndedJune 30, June 30,2017 2018 2017 2018Revenues $ 26,010 $ 32,657 $ 50,760 $ 63,803Costs and expenses:Cost of revenues 10,373 13,883 20,168 27,350Research and development 4,172 5,114 8,114 10,153Sales and marketing 2,897 3,780 5,541 7,384General and administrative 1,700 2,002 3,501 4,037European Commission fines 2,736 5,071 2,736 5,071Total costs and expenses 21,878 29,850 40,060 53,995Income from operations 4,132 2,807 10,700 9,808Other income (expense), net 245 1,408 496 4,950Income before income taxes 4,377 4,215 11,196 14,758Provision for income taxes 853 1,020 2,246 2,162Net income $ 3,524 $ 3,195 $ 8,950 $ 12,596Basic earnings per share of Class A and B common stock andClass C capital stock $ 5.09 $ 4.60 $ 12.94 $ 18.13Diluted earnings per share of Class A and B common stock andClass C capital stock $ 5.01 $ 4.54 $ 12.74 $ 17.89Alphabet Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS(In millions; unaudited)Three Months Ended Six Months EndedJune 30, June 30,2017 2018 2017 2018Operating activitiesNet income $ 3,524 $ 3,195 $ 8,950 $ 12,596Adjustments:Depreciation and impairment of property and equipment 1,424 1,862 2,711 3,653Amortization and impairment of intangible assets 201 252 417 447Stock-based compensation expense 2,003 2,413 4,012 4,870Deferred income taxes (75) (139) 538 (157)(Gain) loss on debt and equity securities, net 3 (1,068) 22 (4,060)Other 39 137 96 (120)Changes in assets and liabilities, net of effects of acquisitions:Accounts receivable (836) (312) 431 1,388Income taxes, net (2,289) (1,438) (1,779) (656)Other assets (326) (515) (454) (756)Accounts payable 16 (145) 119 (23)Accrued expenses and other liabilities 3,555 5,742 1,687 4,600Accrued revenue share 80 (17) 6 (303)Deferred revenue 84 165 195 295Net cash provided by operating activities 7,403 10,132 16,951 21,774Investing activitiesPurchases of property and equipment (2,831) (5,477) (5,339) (12,776)Proceeds from disposals of property and equipment 13 19 54 49Purchases of marketable securities (19,557) (14,192) (39,676) (23,041)Maturities and sales of marketable securities 14,876 16,172 34,238 25,523Purchases of non-marketable investments (340) (405) (694) (732)Maturities and sales of non-marketable investments 40 693 118 1,191Acquisitions, net of cash acquired, and purchases of intangibleassets (42) (184) (143) (1,434)Proceeds from collection of notes receivable 669 0 1,419 0Net cash used in investing activities (7,172) (3,374) (10,023) (11,220)Financing activitiesNet payments related to stock-based award activities (1,084) (1,541) (2,093) (2,699)Repurchases of capital stock (1,618) (2,052) (2,745) (4,225)Proceeds from issuance of debt, net of costs 0 1,545 0 6,236Repayments of debt (38) (2,889) (56) (6,267)Proceeds from sale of subsidiary shares 0 0 480 0Net cash used in financing activities (2,740) (4,937) (4,414) (6,955)Effect of exchange rate changes on cash and cash equivalents 88 (331) 279 (166)Net increase (decrease) in cash and cash equivalents (2,421) 1,490 2,793 3,433Cash and cash equivalents at beginning of period 18,132 12,658 12,918 10,715Cash and cash equivalents at end of period $ 15,711 $ 14,148 $ 15,711 $ 14,148Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures (in millions,except percentages, share amounts which are reflected in thousands and per share amounts, unaudited)We provide non-GAAP consolidated results excluding certain charges because they allow investors to make meaningfulcomparisons between Alphabets recurring core business operating results and those of other companies, as well asproviding Alphabets management with an important tool for financial and operational decision making and for evaluatingAlphabets own recurring core business operating results over different periods of time.Three MonthsEnded June 30,2017Three MonthsEnded June 30,2018Operating income (GAAP) $ 4,132 $ 2,807Add: European Commission (EC) fines* 2,736 5,071Operating income, excluding the EC fines (Non-GAAP) $ 6,868 $ 7,878Operating margin (GAAP) 16% 9%Operating margin, excluding the EC fines (Non-GAAP) 26% 24%Net income (GAAP) $ 3,524 $ 3,195Add: EC fines* 2,736 5,071Net income, excluding the EC fines (Non-GAAP) $ 6,260 $ 8,266Diluted net income per share (GAAP) $ 5.01 $ 4.54Diluted net income per share, excluding the EC fines (Non-GAAP) $ 8.90 $ 11.75Shares used in diluted per share calculation (in thousands) 703,503 703,247*There is no tax effect as these charges are not tax deductible.Non-GAAP operating income: we define non-GAAP operating income as operating income excluding certain charges.Non-GAAP operating margin: we define non-GAAP operating margin as non-GAAP operating income divided by revenues.Non-GAAP net income and diluted EPS: We define non-GAAP net income as net income excluding certain charges, less the relatedtax effects as applicable and non-GAAP diluted EPS as net income excluding certain charges, less the related tax effects asapplicable, divided by total weighted average outstanding shares, on a fully-diluted basis.Reconciliation from net cash provided by operating activities to free cash flow (in millions, unaudited):We provide free cash flow because it is a liquidity measure that provides useful information to management andinvestors about the amount of cash generated by the business that can be used for strategic opportunities, includinginvesting in our business and acquisitions, and to strengthen our balance sheet.Three MonthsEnded June 30,2018Net cash provided by operating activities $ 10,132Less: purchases of property and equipment (5,477)Free cash flow $ 4,655Free cash flow: We define free cash flow as net cash provided by operating activities less capital expenditures.Reconciliation from GAAP revenues to non-GAAP constant currency revenues (in millions, unaudited):We provide non-GAAP constant currency revenues and growth because they facilitate the comparison of currentresults to historic performance by excluding the impact of foreign exchange rate movements and hedging activities,which are not indicative of our core operating results.Three Months EndedJune 30, 2018Three Months EndedJune 30, 2018YoY(using Q217s FX rates)QoQ(using Q118s FX rates)EMEA revenues (GAAP) $ 10,785 $ 10,785Exclude foreign exchange impact on Q218 revenues using Q217 rates (721) N/AExclude foreign exchange impact on Q218 revenues using Q118 rates N/A 127Exclude hedging impact recognized in Q218 103 103EMEA constant currency revenues (non-GAAP) $ 10,167 $ 11,015Prior period EMEA revenues, excluding hedging impact (non-GAAP) $ 8,557 $ 10,691EMEA revenue growth (GAAP) 26% 3 %EMEA constant currency revenue growth (non-GAAP) 19% 3 %APAC revenues (GAAP) $ 5,090 $ 5,090E
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