MOUNTAIN VIEW, Calif. – October 22, 2015 – Alphabet Inc. (NASDAQ: GOOG, GOOGL), the successor issuer to, and parent holding company of, Google Inc., today announced financial results of Google as it existed prior to the reorganization that became effective on October 2, 2015 for the quarter ended September 30, 2015.
“Our Q3 results show the strength of Google's business, particularly in mobile search. With six products now having more than 1 billion users globally, we're excited about the opportunities ahead of Google, and across Alphabet,” said Ruth Porat, CFO of Alphabet and Google.
Q3 2015 Financial Highlights
The following summarizes our consolidated financial results for the quarters ended September 30, 2014 and 2015 (in millions, except for per share information; unaudited):
|
Three Months Ended September 30, 2014 |
Three Months Ended September 30, 2015 |
||||||
|---|---|---|---|---|---|---|---|
| Revenues | $ | 16,523 | $ | 18,675 | |||
| Increase in revenues year over year | 20 | % | 13 | % | |||
| Traffic acquisition costs (TAC) | $ | 3,348 | $ | 3,566 | |||
| GAAP operating income | $ | 3,724 | $ | 4,708 | |||
| GAAP operating margin | 23 | % | 25 | % | |||
| Non-GAAP operating income | $ | 5,357 | $ | 6,140 | |||
| Non-GAAP operating margin | 32 | % | 33 | % | |||
| GAAP net income* | $ | 2,739 | $ | 3,979 | |||
| Non-GAAP net income | $ | 4,299 | $ | 5,102 | |||
| GAAP diluted EPS for Class A and B common stock and Class C capital stock* | $ | 3.98 | $ | 5.73 | |||
| Non-GAAP diluted EPS for Class A and B common stock and Class C capital stock | $ | 6.25 | $ | 7.35 | |||
| Diluted shares (in thousands) | 688,215 | 694,319 | |||||
| *GAAP net income and diluted EPS include Net Loss from Discontinued Operations for the three months ended September 30, 2014. | |||||||
Operating income, operating margin, net income, and earnings per share (EPS) are reported on a GAAP and non-GAAP basis. Non-GAAP operating income and non-GAAP operating margin exclude stock-based compensation (SBC) expense from continuing operations. Non-GAAP net income and non-GAAP diluted EPS exclude SBC expense from continuing operations, net of the related tax benefits, as well as the impact from Net Loss from Discontinued Operations. In the third quarter of 2014, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income, and non-GAAP diluted EPS also excluded an impairment charge of $378 million related to a patent licensing royalty asset acquired in connection with the purchase of Motorola. These non-GAAP measures, as well as free cash flow, an alternative non-GAAP measure of liquidity, and non-GAAP constant currency revenues and growth, are described and reconciled to the corresponding GAAP measures at the end of this release.
Q3 2015 Financial Summary
Revenues and Monetization
Revenues by source (in millions; unaudited):
|
Three Months Ended September 30, 2015 |
Change from Q3 2014 to Q3 2015 (YoY) | Change from Q2 2015 to Q3 2015 (QoQ) | ||||||
|---|---|---|---|---|---|---|---|---|
| Google websites | $ | 13,087 | 16 | % | 6 | % | ||
| Google Network Members' websites | 3,694 | 4 | % | 2 | % | |||
| Total advertising revenues* | 16,781 | 13 | % | 5 | % | |||
| Other revenues | 1,894 | 11 | % | 11 | % | |||
| Revenues | $ | 18,675 | 13 | % | 5 | % | ||
| *Advertising revenues are generally reported on a gross basis, consistent with GAAP, without deducting TAC. | ||||||||
Had foreign exchange rates remained constant from the third quarter of 2014 through the third quarter of 2015, our revenues in the third quarter of 2015 would have been $1,291 million higher with a constant currency growth rate of 21% year over year. This includes a foreign exchange rate impact of $1,577 million, offset by hedging gains of $286 million related to our foreign exchange risk management program. Our constant currency revenues are presented in the financial tables following this release as well as in the accompanying materials on the Investor Relations website.
Paid clicks and cost-per-click information (unaudited):
|
Change from Q3 2014 to Q3 2015 (YoY) |
Change from Q2 2015 to Q3 2015 (QoQ) |
|||||
|---|---|---|---|---|---|---|
| Aggregate paid clicks | 23 | % | 6 | % | ||
| Paid clicks on Google websites | 35 | % | 7 | % | ||
| Paid clicks on Google Network Members' websites | (5) | % | 0 | % | ||
| Aggregate cost-per-click | (11) | % | (1) | % | ||
| Cost-per-click on Google websites | (16) | % | (2) | % | ||
| Cost-per-click on Google Network Members' websites | (4) | % | 1 | % | ||
Costs and Expenses
Traffic acquisition costs (TAC), other cost of revenues, operating expenses, stock-based compensation expense, and depreciation, amortization, and impairment charges (in millions; unaudited):
|
Three Months Ended September 30, 2014 |
Three Months Ended September 30, 2015 |
||||||
|---|---|---|---|---|---|---|---|
| TAC to Google Network Members | $ | 2,421 | $ | 2,514 | |||
| TAC to distribution partners | $ | 927 | $ | 1,052 | |||
| Total TAC | $ | 3,348 | $ | 3,566 | |||
| TAC to Google Network Members as % of Google Network Members' revenues | 68 | % | 68 | % | |||
| TAC to distribution partners as % of Google website revenues | 8 | % | 8 | % | |||
| Total TAC as % of advertising revenues | 23 | % | 21 | % | |||
| Other cost of revenues | $ | 3,347 | $ | 3,471 | |||
| Other cost of revenues as % of revenues | 20 | % | 19 | % | |||
| Operating expenses (other than cost of revenues) | $ | 6,104 | $ | 6,930 | |||
| Operating expenses as % of revenues | 37 | % | 37 | % | |||
| Stock-based compensation expense* | $ | 1,255 | $ | 1,432 | |||
| Tax benefit related to stock-based compensation expense | $ | (258) | $ | (309) | |||
| Depreciation, amortization, and impairment charges* | $ | 1,524 | $ | 1,248 | |||
| *Included in Cost of revenues and Operating expenses. Excludes impact from discontinued operations for the three months ended September 30, 2014. | |||||||
Supplemental Information (in millions except for headcount data; unaudited)
|
Three Months Ended September 30, 2014 |
Three Months Ended September 30, 2015 |
||||||
|---|---|---|---|---|---|---|---|
| Cash, cash equivalents, and marketable securities | $ | 62,157 | $ | 72,767 | |||
| Net cash provided by operating activities | $ | 5,994 | $ | 6,007 | |||
| Capital expenditures* | $ | 2,417 | $ | 2,373 | |||
| Free cash flow | $ | 3,577 | $ | 3,634 | |||
| Effective tax rate | 24 | % | 19 | % | |||
| Headcount | 51,564 | 59,976 | |||||
| *For Q3 2015, our capital expenditures are primarily related to production equipment, data center construction, and facilities. | |||||||
Adjustments to Previously Reported Financial Information
In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities, and as a consequence, we revised our income tax expense for periods beginning in 2008 through the first quarter of 2015 in the cumulative amount of $711 million. The income tax amount is not material to the periods impacted and consolidated revenues are not impacted. We elected to revise previously issued consolidated financial statements for the periods impacted.
In the first quarter of 2015, we reclassified revenues primarily related to DoubleClick ad serving software revenues from Other revenues to Advertising revenues from Google Network Members' websites. Prior period amounts have been adjusted to conform with our current period presentation.
Alphabet Reorganization
On August 10, 2015, we announced plans to create a new public holding company, Alphabet, and a new operating structure. On October 2, 2015, we announced the implementation of the holding company reorganization, in which Alphabet became the successor issuer to Google. The new operating structure is being introduced in phases. For financial reporting purposes, we expect the reorganization will result in disclosing our Google business as a single segment and all other Alphabet businesses combined as Other Bets beginning in the fourth quarter of 2015.
Stock Repurchase
The board of directors of Alphabet authorized the company to repurchase up to $5,099,019,513.59 of its Class C capital stock, commencing in the fourth quarter of 2015. The repurchase is expected to be executed from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated transactions, including through Rule 10b5-1 plans.
Webcast and Conference Call Information
A live audio webcast of our third quarter 2015 earnings release call will be available at http://investor.google.com/webcast.html. The call begins today at 1:30 PM (PT) / 4:30 PM (ET). This press release, the financial tables, as well as other supplemental information including the reconciliations of certain non-GAAP measures to their nearest comparable GAAP measures, are also available on that site.
We also announce investor information, including news and commentary about our business and financial performance, SEC filings, notices of investor events and our press and earnings releases, on our investor relations website (http://investor.google.com).
Forward-Looking Statements
This press release may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from the results predicted, and reported results should not be considered as an indication of future performance. The potential risks and uncertainties that could cause actual results to differ from the results predicted include, among others, those risks and uncertainties included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2014 and our most recent Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, which are on file with the SEC and are available on our investor relations website at investor.google.com and on the SEC website at www.sec.gov. Additional information will also be set forth in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2015. All information provided in this release and in the attachments is as of October 22, 2015, and we undertake no duty to update this information unless required by law.
About Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use the following non-GAAP financial measures: non-GAAP operating income, non-GAAP operating margin, non-GAAP net income, non-GAAP diluted EPS, free cash flow, non-GAAP constant currency revenues, and non-GAAP constant currency revenue growth. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.
We use these non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Our management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance and liquidity by excluding certain expenses and expenditures that may not be indicative of our recurring core business operating results, such as our revenues excluding the impact for foreign currency fluctuations or our operating performance excluding not only non-cash charges, such as SBC, but also discrete cash charges that are infrequent in nature. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, and analyzing future periods. These non-GAAP financial measures also facilitate management's internal comparisons to our historical performance and liquidity as well as comparisons to our competitors' operating results. We believe these non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business.
For more information on these non-GAAP financial measures, please see the tables captioned "Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures," "Reconciliation from net cash provided by operating activities to free cash flow," and "Reconciliation from GAAP revenues to non-GAAP constant currency revenues" included at the end of this release.
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