2023-05-12_2023_q1_goog_mdna.txt

Please read the following discussion and analysis of our financial condition and results of operations together with "Note About Forward-Looking Statements" and our consolidated financial statements and related notes included under Item 1 of this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, including Part I, Item 1A "Risk Factors."

Understanding Alphabet’s Financial Results

Alphabet is a collection of businesses — the largest of which is Google. We report Google in two segments, Google Services and Google Cloud; we also report all non-Google businesses collectively as Other Bets. For further details on our segments, see Note 14 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

Revenues and Monetization Metrics

We generate revenues by delivering relevant, cost-effective online advertising; cloud-based solutions that provide enterprise customers of all sizes with infrastructure and platform services as well as communication and collaboration tools; sales of other products and services, such as apps and in-app purchases, and hardware; and fees received for subscription-based products. For details on how we recognize revenue, see Note 1 of the Notes to Consolidated Financial Statements included in Part II, Item 8 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

In addition to the long-term trends and their financial effect on our business noted in "Trends in Our Business and Financial Effect" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, fluctuations in our revenues have been and may continue to be affected by a combination of factors, including:

changes in foreign currency exchange rates;

changes in pricing, such as those resulting from changes in fee structures, discounts, and customer incentives;

general economic conditions and various external dynamics, including geopolitical events, regulations, and other measures and their effect on advertiser, consumer, and enterprise spending;

new product and service launches; and

seasonality.

Additionally, fluctuations in our revenues generated from advertising ("Google advertising"), revenues from other sources ("Google other revenues"), Google Cloud, and Other Bets revenues have been and may continue to be affected by other factors unique to each set of revenues, as described below.

Google Services

Google Services revenues consist of Google advertising as well as Google other revenues.

Google Advertising

Google advertising revenues are comprised of the following:

Google Search  other, which includes 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, which includes revenues generated on YouTube properties; and

Google Network, which includes revenues generated on Google Network properties participating in AdMob, AdSense, and Google Ad Manager.

We use certain metrics to track how well traffic across various properties is monetized as it relates to our advertising revenues: paid clicks and cost-per-click pertain to traffic on Google Search  other properties, while impressions and cost-per-impression pertain to traffic on our Google Network properties.

Paid clicks represent engagement by users and include clicks on advertisements by end-users on Google search properties and other Google owned and operated properties including Gmail, Google Maps, and Google

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Play. 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.

Impressions include impressions displayed to users on Google Network properties participating primarily in AdMob, AdSense, and Google Ad Manager. 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 and the number of impressions, and for identifying the revenues generated by the corresponding click and impression activity.

Fluctuations in our advertising revenues, 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 properties and the correlation between these items have been and may continue to be affected by additional factors, such as:

advertiser competition for keywords;

changes in advertising quality, formats, delivery or policy;

changes in device mix;

seasonal fluctuations in internet usage, advertising expenditures, and underlying business trends, such as traditional retail seasonality; and

traffic growth in emerging markets compared to more mature markets and across various verticals and channels.

Google Other

Google other revenues are comprised of the following:

Google Play, which includes sales of apps and in-app purchases;

hardware, which includes sales of Fitbit wearable devices, Google Nest home products, and Pixel devices;

YouTube non-advertising, which includes subscription revenues from services such as YouTube Premium and YouTube TV; and

other products and services.

Fluctuations in our Google other revenues have been and may continue to be affected by additional factors, such as changes in customer usage and demand, number of subscribers, and fluctuations in the timing of product launches.

Google Cloud

Google Cloud revenues are comprised of the following:

Google Cloud Platform, which includes fees for infrastructure, platform, and other services;

Google Workspace, which includes fees for cloud-based communication and collaboration tools for enterprises, such as Gmail, Docs, Drive, Calendar and Meet; and

other enterprise services.

Fluctuations in our Google Cloud revenues have been and may continue to be affected by additional factors, such as customer usage.

Other Bets

Revenues from Other Bets are generated primarily from the sale of health technology and internet services.

Costs and Expenses

Our cost structure has two components: cost of revenues and operating expenses. Our operating expenses include costs related to RD, sales and marketing, and general and administrative functions. Certain of our costs and expenses, including those associated with the operation of our technical infrastructure as well as components of our operating expenses, are generally less variable in nature and may not correlate to changes in revenue.

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Cost of Revenues

Cost of revenues is comprised of TAC and other costs of revenues.

TAC includes:

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.

Amounts paid to Google Network partners primarily for ads displayed on their properties.

Other cost of revenues includes:

Content acquisition costs, which are payments to content providers from whom we license video and other content for distribution on YouTube 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, depreciation, energy, and other equipment costs) as well as other operations costs (such as content review as well as customer and product support costs).

Inventory and other costs related to the hardware we sell.

TAC as a percentage of revenues generated from ads placed on Google Network properties are significantly higher than TAC as a percentage of revenues generated from ads placed on Google Search  other properties, because most of the advertiser revenues from ads served on Google Network properties are paid as TAC to our Google Network partners.

Operating Expenses

Operating expenses are generally incurred during our normal course of business, which we categorize as either RD, sales and marketing, or general and administrative.

The main components of our RD expenses are:

compensation expenses for engineering and technical employees responsible for RD related to our existing and new products and services;

depreciation; and

third-party services fees primarily relating to consulting and outsourced services in support of our engineering and product development efforts.

The main components of our sales and marketing expenses are:

compensation expenses for employees engaged in sales and marketing, sales support, and certain customer service functions; and

spending relating to our advertising and promotional activities in support of our products and services.

The main components of our general and administrative expenses are:

compensation expenses for employees in finance, human resources, information technology, legal, and other administrative support functions;

expenses relating to legal matters, including fines and settlements; and

third-party services fees, including audit, consulting, outside legal, and other outsourced administrative services.

Other Income (Expense), Net

Other income (expense), net primarily consists of interest income (expense), the effect of foreign currency exchange gains (losses), net gains (losses) and impairment on our marketable and non-marketable securities, performance fees, and income (loss) and impairment from our equity method investments.

For additional details, including how we account for our investments and factors that can drive fluctuations in the value of our investments, see Note 1 of the Notes to Consolidated Financial Statements included in Part II, Item 8 and Item 7A, “Quantitative and Qualitative Disclosur

es About Market Risk” in our An

nual Report on Form 10-K for

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the fiscal year ended December 31, 2022 as well as Note 3 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

Provision for Income Taxes

Provision for income taxes represents the estimated amount of federal, state, and foreign income taxes incurred in the U.S. and the many jurisdictions in which we operate. The provision includes the effect of reserve provisions and changes to reserves that are considered appropriate as well as the related net interest and penalties.

For additional details, see Note 1 of the Notes to Consolidated Financial Statements included in Part II, Item 8

in our An

nual Report on Form 10-K for the fiscal year ended December 31, 2022 as well as Note 13 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

Executive Overview

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

Three Months Ended

March 31,

2022

2023

$ Change

% Change

Consolidated revenues

68,011

69,787

1,776

Change in consolidated constant currency revenues

(1)

Cost of revenues

29,599

30,612

1,013

Operating expenses

18,318

21,760

3,442

19

Operating income

20,094

17,415

(2,679)

(13)

Operating margin

30

25

(5)

Other income (expense), net

(1,160)

790

1,950

NM

Net Income

16,436

15,051

(1,385)

(8)

Diluted EPS

1.23

1.17

(0.06)

(5)

NM = Not Meaningful

(1)

See "Use of Non-GAAP Constant Currency Measures" below for details relating to our use of constant currency information.

Revenues were $69.8 billion, an increase of 3% year over year, primarily driven by an increase in Google Cloud revenues of $1.6 billion, or 28%.

Total constant currency revenues, which exclude the effect of hedging, increased 6% year over year.

Cost of revenues was $30.6 billion, an increase of 3% year over year, affected by compensation costs related to employee severance charges associated with the reduction in our workforce, charges related to our office space optimization efforts, and a reduction in depreciation expense due to the change in estimated useful life of our servers and certain network equipment.

Operating expenses were $21.8 billion, an increase of 19% year over year, affected by compensation costs related to employee severance charges associated with the reduction in our workforce as well as the effect of a shift in timing of our annual employee stock-based compensation awards.

Other Information

In January 2023, we announced a reduction of our workforce, and as a result in the first quarter of 2023 we recorded employee severance and related charges of $2.0 billion, representing the majority of expected costs associated with this action. In addition, we are taking actions to optimize our global office space, and as a result we recorded charges related to office space reductions of $564 million in the first quarter of 2023.

We may incur additional charges in the future as we further evaluate our real estate needs. For

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additional information, see Note 7 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

In January 2023, we completed an assessment of the useful lives of our servers and network equipment, resulting in a change in the estimated useful life of our servers and certain network equipment to six years. The effect of this change was a reduction in depreciation expense

of $988 million fo

r the first quarter of 2023, recognized primarily in cost of revenues and RD expenses. For additional information, see Note 1 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

Beginning in the first quarter of 2023, our segment reporting reflects two changes: (i) DeepMind, previously reported within Other Bets, is reported as part of Alphabet's unallocated corporate costs, and (ii) we updated and simplified our cost allocation methodologies to provide our business leaders with increased transparency for decision-making. Prior periods have been recast to conform to the current presentation. For additional information, see Note 14 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

Beginning in 2023, the timing of our annual employee stock-based compensation awards shifted from January to March. W

hile the shift in timing itself will not affect the amount of stock-based compensation expense over the full fiscal year 2023, it results in relatively less expense recognized in the first quarter compared to the remaining quarters of the year.

epurchases of Class A and Class C shares were $15.1 billion for the three months ended March 31, 2023. See Note 10 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information.

Operating cash flow was $23.5 billion for the three months ended March 31, 2023.

Capital expenditures, which primarily reflected investments in technical infrastructure, were $6.3 billion for the three months ended March 31, 2023.

As of March 31, 2023, we had 190,711 employees, which includes almost all of the employees affected by the reduction of our workforce. We expect most of those affected will no longer be reflected in our headcount by the end of the second quarter of 2023, subject to local law and consultation requirements.

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Financial Results

Revenues

The following table presents revenues by type (in millions):

Three Months Ended

March 31,

2022

2023

Google Search  other

39,618

40,359

YouTube ads

6,869

6,693

Google Network

8,174

7,496

Google advertising

54,661

54,548

Google other

6,811

7,413

Google Services total

61,472

61,961

Google Cloud

5,821

7,454

Other Bets

440

288

Hedging gains (losses)

278

84

Total revenues

68,011

69,787

Google Services

Google advertising revenues

Google Search  other

Google Search  other revenues increased $741 million from the three months ended March 31, 2022 to the three months ended March 31, 2023. The overall growth was driven by interrelated factors including increases in search queries resulting from growth in user adoption and usage on mobile devices; growth in advertiser spending; and improvements we have made in ad formats and delivery. Growth was adversely affected by changes in foreign currency exchange rates.

YouTube ads

YouTube ads revenues decreased $176 million from the three months ended March 31, 2022 to the three months ended March 31, 2023 primarily driven by the adverse effect of changes in foreign currency exchange rates.

Google Network

Google Network revenues decreased $678 million from the three months ended March 31, 2022 to the three months ended March 31, 2023 primarily driven by a decrease in AdMob and Google Ad Manager revenues as well as the adverse effect of changes in foreign currency exchange rates.

Monetization Metrics

Paid clicks and cost-per-click

The following table presents changes in paid clicks and cost-per-click (expressed as a percentage) from the three months ended March 31, 2022 to the three months ended March 31, 2023:

Paid clicks change

8%

Cost-per-click change

(7)%

Paid clicks increased from the three months ended March 31, 2022 to the three months ended March 31, 2023 driven by a number of interrelated factors, including an increase in search queries resulting from growth in user adoption and usage on mobile devices; growth in advertiser spending; and ongoing product and policy changes.

Cost-per-click decreased from the three months ended March 31, 2022 to the three months ended March 31, 2023 driven by a number of interrelated factors including changes in device mix, geographic mix, advertiser spending, ongoing product and policy changes, and property mix, as well as the adverse effect of changes in foreign currency exchange rates.

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Impressions and cost-per-impression

The following table presents changes in impressions and cost-per-impression (expressed as a percentage) from the three months ended March 31, 2022 to the three months ended March 31, 2023:

Impressions change

(5)%

Cost-per-impression change

(5)%

Impressions decreased from the three months ended March 31, 2022 to the three months ended March 31, 2023 driven by Google Ad Manager and AdSense. The decrease in cost-per-impression from the three months ended March 31, 2022 to the three months ended March 31, 2023 was driven by a number of interrelated factors including ongoing product and policy changes, changes in device mix, geographic mix, product mix, and property mix, as well as the adverse effect of changes in foreign currency exchange rates.

Google other revenues

Google other revenues increased $602 million from the three months ended March 31, 2022 to the three months ended March 31, 2023 primarily driven by growth in YouTube non-advertising, largely due to an increase in paid subscribers. Growth was adversely affected by changes in foreign currency exchange rates.

Google Cloud

Google Cloud revenues increased $1.6 billion from the three months ended March 31, 2022 to the three months ended March 31, 2023. Growth was primarily driven by Google Cloud Platform followed by Google Workspace offerings. Google Cloud's infrastructure and platform services were the largest drivers of growth in Google Cloud Platform.

Revenues by Geography

The following table presents revenues by geography as a percentage of revenues, determined based on the addresses of our customers:

Three Months Ended

March 31,

2022

2023

United States

47

47

EMEA

30

30

APAC

17

17

Other Americas

For further details on revenues by geography, see Note 2 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

Use of Non-GAAP Constant Currency Information

International revenues, which represent a significant portion of our revenues, are generally transacted in multiple currencies and therefore are affected by fluctuations in foreign currency exchange rates.

The effect of currency exchange rates on our business is an important factor in understanding period-to-period comparisons. We use non-GAAP constant currency revenues ("constant currency revenues") and non-GAAP percentage change in constant currency revenues ("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 U.S. Generally Accepted Accounting Principles (GAAP) results helps improve the ability to understand our performance, because it excludes 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 revenues excluding the effect of foreign exchange rate movements ("FX Effect") as well as hedging activities, which are recognized at the consolidated level. We use constant currency revenues 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 year comparable 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 current period revenues over prior year comparable period revenues where current period foreign currency revenues are

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translated using prior year comparable 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.

Th

e following table presents the foreign exchange effect on international revenues and total revenues (in millions, except percentages):

Three Months Ended March 31, 2023

% Change from Prior Period

Three Months Ended March 31,

Less FX Effect

Constant Currency Revenues

As Reported

Less Hedging Effect

Less FX Effect

Constant Currency Revenues

2022

2023

United States

31,733

32,864

32,864

EMEA

20,317

21,078

(1,173)

22,251

(6)

10

APAC

11,841

11,681

(834)

12,515

(1)

(7)

Other Americas

3,842

4,080

(167)

4,247

(5)

11

Revenues, excluding hedging effect

67,733

69,703

(2,174)

71,877

(3)

Hedging gains (losses)

278

84

Total revenues

(1)

68,011

69,787

71,877

(3)

(1)

Total constant currency revenues of $71.9 billion for the three months ended March 31, 2023 increased $4.1 billion compared to $67.7 billion in revenues, excluding hedging effect, for the three months ended March 31, 2022.

EMEA revenue growth was unfavorably affected by changes in foreign currency exchange rates, primarily due to the U.S. dollar strengthening relative to the Euro and the British pound.

APAC revenue growth was unfavorably affected by changes in foreign currency exchange rates, primarily due to the U.S. dollar strengthening relative to the Japanese yen.

Other Americas revenue growth was unfavorably affected by changes in foreign currency exchange rates, primarily due to the U.S. dollar strengthening relative to the Argentine peso.

Costs and Expenses

Cost of Revenues

The following table presents cost of revenues, including TAC (in millions, except percentages):

Three Months Ended

March 31,

2022

2023

TAC

11,990

11,721

Other cost of revenues

17,609

18,891

Total cost of revenues

29,599

30,612

Total cost of revenues as a percentage of revenues

44

44

Cost of revenues increased $1.0 billion from the three months ended March 31, 2022 to the three months ended March 31, 2023 due to an increase in other cost of revenues of $1.3 billion, partially offset by a decrease in TAC of $269 million.

The decrease in TAC from the three months ended March 31, 2022 to the three months ended March 31, 2023 was largely due to a decrease in TAC paid to Google Network partners, primarily driven by a decrease in revenues subject to TAC. The TAC rate decreased from 21.9% to 21.5% from the three months ended March 31, 2022 to the three months ended March 31, 2023 primarily due to a revenue mix shift from Google Network properties to Google Search  other properties. The TAC rate on Google Search  other revenues and the TAC rate on Google Network revenues were both substantially consistent from three months ended March 31, 2022 to the three months ended March 31, 2023.

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The increase in other cost of revenues from the three months ended March 31, 2022 to the three months ended March 31, 2023

was primarily due to increases in data center and other operations costs which includes $681 million o

f charges related to employee severance associated with the reduction of our workforce and our office space optimization efforts,

partially offset by a reduction in depreciation expense due to the change in the estimated useful life of our servers and certain network equipment.

Research and Development

The following table presents RD expenses (in millions, except percentages):

Three Months Ended

March 31,

2022

2023

Research and development expenses

9,119

11,468

Research and development expenses as a percentage of revenues

13

16

RD expenses increased $2.3 billion from the three months ended March 31, 2022 to the three months ended March 31, 2023 primarily driven by an increase in compensation expenses of $1.7 billion and an increase in facilities costs due to the

$247 million

in charges related to our office space optimization efforts. The $1.7 billion increase in compensation expenses was largely the result of a 14%

increase in average headcount, after adjusting for roles affected by the reduction in workforce for the quarter ended March 31, 2023, and

$835 million

in employee severance charges

associated with the reduction of our workforce

, partially offset by the effect of the shift in timing of our annual employee stock-based compensation awards. Additionally, an increase in depreciation of $126 million includes the effect of the change in the estimated useful lives of our servers and network equipment.

Sales and Marketing

The following table presents sales and marketing expenses (in millions, except percentages):

Three Months Ended

March 31,

2022

2023

Sales and marketing expenses

5,825

6,533

Sales and marketing expenses as a percentage of revenues

Sales and marketing expenses increased $708 million from the three months ended March 31, 2022 to the three months ended March 31, 2023 primarily driven by an increase in compensation expenses of $734 million,

largely resulting from $445 million in employee severance charges

associated with the reduction in our workforce

and a

7% increase

in average headcount, after adjusting for roles affected by the reduction in workforce for the quarter ended March 31, 2023, partially offset by the effect of the shift in timing of our annual employee stock-based compensation awards.

General and Administrative

The following table presents general and administrative expenses (in millions, except percentages):

Three Months Ended

March 31,

2022

2023

General and administrative expenses

3,374

3,759

General and administrative expenses as a percentage of revenues

General and administrative expenses increased $385 million from the three months ended March 31, 2022 to the three months ended March 31, 2023, primarily driven by an increase in compensation expenses of $293 million,

largely resulting from $253 million in employee severance charges

associated with the reduction in our workforce

and an

6% increase

in average headcount, after adjusting for roles affected by the reduction in workforce for the quarter ended March 31, 2023, partially offset by the effect of the shift in timing of our annual employee stock-based compensation awards.

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Segment Profitability

The following table presents segment operating income (loss) (in millions).

Three Months Ended

March 31,

2022

2023

Operating income (loss):

Google Services

21,973

21,737

Google Cloud

(706)

191

Other Bets

(835)

(1,225)

Corporate costs, unallocated

(1)

(338)

(3,288)

Total income from operations

20,094

17,415

(1)

Hedging gains (losses) related to revenue included in unallocated corporate costs were

$278 million and $84 million for the three months ended March 31, 2022 and 2023, respectively. For the three months ended March 31, 2023, unallocated corporate costs inc

lude charges related to the reductions in our workforce and office space totaling $2.5 billion

Google Services

Google Services operating income decreased $236 million from the three months ended March 31, 2022 to the three months ended March 31, 2023. The decrease in operating income was primarily driven by an increase in compensation expenses, partially offset by the effect of the shift in timing of our annual employee stock-based compensation awards, a reduction in costs driven by the change in the estimated useful life of our servers and certain network equipment, and growth in revenues.

Google Cloud

Google Cloud operating income of $191 million for the three months ended March 31, 2023 compared to an operating loss of $706 million for the three months ended March 31, 2022 represents an increase of $897 million.

The increase was primarily driven by revenue growth, partially offset by an increase in compensation expenses. Additionally, operating income benefited from a reduction in costs driven by the change in the estimated useful life of our servers and certain network equipment and the effect of the shift in timing of our annual employee stock-based compensation awards.

Other Bets

Other Bets operating loss increased $390 million from the three months ended March 31, 2022 to the three months ended March 31, 2023 due to a combination of factors none of which were individually significant.

Other Income (Expense), Net

The following table presents other income (expense), net (in millions):

Three Months Ended

March 31,

2022

2023

Other income (expense), net

(1,160)

790

Other income (expense), net, increased $2.0 billion from the three months ended March 31, 2022 to the three months ended March 31, 2023 primarily due to unrealized gains and losses on equity securities and changes in interest income. In the three months ended March 31, 2023, $797 million of interest income was recognized and $221 million and $51 million of net unrealized gains were recognized on non-marketable and marketable equity securities, respectively. In the three months ended March 31, 2022, $1.5 billion of net unrealized losses were recognized on marketable equity securities, partially offset by $460 million of net unrealized gains on non-marketable equity securities and $414 million of interest income.

See Note 6 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for further information.

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Provision for Income Taxes

The following table presents provision for income taxes (in millions, except effective tax rate):

Three Months Ended

March 31,

2022

2023

Income before provision for income taxes

18,934

18,205

Provision for income taxes

2,498

3,154

Effective tax rate

13.2

17.3

The effective tax rate increased from the three months ended March 31, 2022 to the three months ended March 31, 2023, primarily driven by a decrease in the stock-based compensation-related tax benefit and proportionally less pre-tax earnings generated in countries that have lower statutory tax rates.

Financial Condition

Cash, Cash Equivalents, and Marketable Securities

As of March 31, 2023, we had

$115.1 billion

in cash, cash equivalents, and short-term 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.

Sources, Uses of Cash and Related Trends

Our principal sources of liquidity are cash, cash equivalents, and marketable securities, as well as the cash flow that we generate from 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.

The following table presents our cash flows (in millions):

Three Months Ended

March 31,

2022

2023

Net cash provided by operating activities

25,106

23,509

Net cash used in investing activities

(9,051)

(2,946)

Net cash used in financing activities

(16,214)

(16,568)

Cash Provided by Operating Activities

Our largest source of cash provided by operations are advertising revenues generated by Google Search  other properties, Google Network properties, and YouTube properties. Additionally, we generate cash through sales of apps and in-app purchases, and hardware; and licensing and service fees, including fees received for Google Cloud offerings and subscription-based products.

Our primary uses of cash from operating activities include payments to distribution and Google Network partners, to employees for compensation, and to content providers. Other uses of cash from operating activities include payments to suppliers for hardware, to tax authorities for income taxes, and other general corporate expenditures.

Net cash provided by operating activities decreased from the three months ended March 31, 2022 to the three months ended March 31, 2023

due to increased cash payments for costs and expenses, partially offset by an increase in cash received from revenues.

Cash Used in Investing Activities

Cash provided by investing activities consists primarily of maturities and sales of investments in marketable and non-marketable securities. Cash used in investing activities consists primarily of purchases of marketable and non-marketable securities, purchases of property and equipment, and payments for acquisitions.

Net cash used in investing activities decreased from the three months ended March 31, 2022 to the three months ended March 31, 2023 primarily due to a decrease in purchases of property and equipment and a decrease in net purchases of and maturities and sales of marketable securities.

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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 repurchases of stock, net payments related to stock-based award activities, and repayments of debt.

Net cash used in financing activities increased from the three months ended March 31, 2022 to the three months ended March 31, 2023 primarily due to an increase in repurchases of stock partially offset by a decrease in net payments related to stock-based award activities.

Liquidity and Material Cash Requirements

We expect existing cash, cash equivalents, short-term marketable securities, cash flows from operations and financing activities to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities for at least the next 12 months and thereafter for the foreseeable future.

Capital Expenditures and Leases

We make investments in land and buildings for data centers and offices and information technology assets through purchases of property and equipment and lease arrangements to provide capacity for the growth of our services and products.

Capital Expenditures

Our capital investments in property and equipment consist primarily of the following major categories:

technical infrastructure, which consists of our investments in servers and network equipment for computing, storage, and networking requirements for ongoing business activities, including AI, (collectively referred to as our information technology assets) and data center land and building construction; and

office facilities, ground-up development projects, and building improvements (also referred to as "fit-outs").

Construction in progress consists primarily of technical infrastructure and office facilities which have not yet been placed in service. The time frame from date of purchase to placement in service of these assets may extend from months to years. For example, our data center construction projects are generally multi-year projects with multiple phases, where we acquire qualified land and buildings, construct buildings, and secure and install information technology assets.

During the three months ended March 31, 2022 and 2023, we spent $9.8 billion and $6.3 billion on capital expenditures, respectively. Depreciation of our property and equipment commences when the deployment of such assets are completed and are ready for our intended use. Land is not depreciated. For the three months ended March 31, 2022 and 2023, our depreciation and impairment expenses on property and equipment were $3.6 billion and $3.1 billion, respectively.

Leases

For the three months ended March 31, 2022 and 2023, we recognized total operating lease assets of $915 million and $1.1 billion, respectively. As of March 31, 2023, the amount of total future l

ease payments under operating leases, which had a weighted average remaining lease term of 8.4 years, was $18.0 billion.

As of March 31, 2023, we have entered into leases that have not yet commenced with future lease payments of $3.0 billion, that are not yet recorded on our Consolidated Balance Sheets. These leases will commence between 2023 and 2026 with non-cancelable lease terms of 1 to 25 years. As of March 31, 2023 our actions to optimize our office space did not affect our operating lease obligations.

For the three months ended March 31, 2022 and 2023, our operating lease expenses (including variable lease costs) were $880 million and $1.1 billion, respectively.

Finance lease costs were not material for the three months ended March 31, 2022 and 2023.

Financing

We have a short-term debt financing program of up to $10.0 billion through the issuance of commercial paper. Net proceeds from this program are used for general corporate purposes. As of March 31, 2023, we had

no

commercial paper outstanding.

As of March 31, 2023, we had $10.0 billion of revolving credit facilities, $4.0 billion expiring in April 2023 and $6.0 billion expiring in April 2026. In April 2023, we entered into a new $4.0 billion revolving credit facility expiring in April 2024 and we also terminated the existing $6.0 billion revolving credit facility expiring in April 2026 and entered into a new $6.0 billion revolving credit facility expiring in April 2028

. The interest rates for all credit facilities are

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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 credit facilities.

As of March 31, 2023, we had senior unsecured notes outstanding with a total carrying value of $12.9 billion. See Note 5 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for further information on our debt.

We primarily utilize contract manufacturers for the assembly of our servers used in our technical infrastructure and hardware products we sell. We have agreements where we may purchase components directly from suppliers and then supply these components to contract manufacturers for use in the assembly of the servers and hardware products. Certain of these arrangements result in a portion of the cash received from and paid to the contract manufacturers to be presented as financing activities in the Consolidated Statements of Cash Flows included in

Item 1 of this Quarterly Report on Form 10-Q

Share Repurchase Program

In April 2022, the Board of Directors of Alphabet authorized the company to repurchase up to $70.0 billion of its Class A and Class C shares. As of March 31, 2023, $13.1 billion remains available for Class A and Class C share repurchases. During the three months ended March 31, 2023, we repurchased and subsequently retired 157 million shares for $15.1 billion. Of the aggregate amount repurchased and subsequently retired, 21 million shares were Class A stock for $2.0 billion and 136 million shares were Class C stock for $13.1 billion.

In April 2023, the Board of Directors of Alphabet authorized the company to repurchase up to an additional $70.0 billion of its Class A and Class C shares. See Note 10 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

The U.S. Inflation Reduction Act of 2022 was enacted on August 16, 2022 and requires a one percent excise tax on certain share repurchases in excess of shares issued for employee compensation made after December 31, 2022. We do not expect this provision to have a material effect on our consolidated financial statements.

European Commission Fines

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. On September 14, 2022, the General Court reduced the 2018 fine from €4.3 billion to €4.1 billion. We subsequently filed an appeal to the European Court of Justice.

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. For further details, see Note 9 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

Taxes

As of March 31, 2023, we had short-term and long-term income taxes payable of $1.6 billion and $4.2 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. We also have taxes payable of $5.5 billion primarily related to uncertain tax positions as of March 31, 2023. Additionally, we are currently evaluating the timing of our 2023 federal tax payments due to payment deferral relief made available by the Internal Revenue Service to taxpayers headquartered in designated counties affected by flooding in California.

Other

We expect the substantial majority of the $1.2 billion liability related to our January 2023 workforce reduction to be settled in fiscal year 2023, subject to local law and consultation requirements. See Note 7 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

Critical Accounting Estimates

See Part II, Item 7, "Critical Accounting Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2022.

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Available Information

Our website is located at

www.abc.xyz

, and our investor relations website is located at

www.abc.xyz/investor

. Access to 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, is available via a link through our investor relations website, free of charge, after we file or furnish them with the SEC and they are available on the SEC's website at

www.sec.gov

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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 3.