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Exhibit
Exhibit 99.1

Alphabet Announces Second Quarter 2016 Results

MOUNTAIN VIEW, Calif. – July 28, 2016 – Alphabet Inc. (NASDAQ: GOOG, GOOGL) today announced financial results for the quarter ended June 30, 2016.
"Our terrific second quarter results, with 21% revenue growth year on year, and 25% on a constant currency basis reflect the successful investments we've made over many years in rapidly expanding areas such as mobile and video. We continue to invest responsibly in support of our many compelling opportunities," said Ruth Porat, CFO of Alphabet.
Q2 2016 financial highlights
The following summarizes our consolidated financial results for the quarters ended June 30, 2015 and 2016 (in millions, except for per share information; unaudited):
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2016
Revenues

$17,727

 

$21,500

Increase in revenues year over year
11
%
 
21
%
Increase in constant currency revenues year over year
18
%
 
25
%
 
 
 
 
GAAP operating income

$4,825

 

$5,968

GAAP operating margin
27
%
 
28
%
Non-GAAP operating income

$5,957

 

$7,471

Non-GAAP operating margin
34
%
 
35
%
 
 
 
 
GAAP net income

$3,931

 

$4,877

Non-GAAP net income

$4,829

 

$5,864

 
 
 
 
GAAP diluted EPS for Class A and B common stock

$4.93

 

$7.00

GAAP diluted EPS for Class C capital stock

$6.43

 

$7.00

Non-GAAP diluted EPS for Class A and B common stock and
Class C capital stock

$6.99

 

$8.42

Diluted shares (in thousands)
*

 
696,847

*For Q2 2015, diluted shares used to calculate GAAP diluted EPS for Class A and B common stock and Class C capital stock were 343,190, 52,114, and 347,688, respectively. Diluted shares used to calculate non-GAAP diluted EPS for Class A and B common stock and Class C capital stock were 690,878.
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. Non-GAAP net income and non-GAAP diluted EPS exclude SBC expense, net of the SBC related tax benefits. For Q2 2015, non-GAAP diluted EPS also excludes the impact from the adjustment payment to Class C capital stockholders. 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.
The following summarizes our segment results where Google is presented as a single segment and all other Alphabet businesses are combined as Other Bets (in millions; unaudited):
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2016
Google segment revenues

$17,653

 

$21,315

Google operating income

$5,608

 

$6,994

 
 
 
 
Other Bets revenues

$74

 

$185

Other Bets operating loss

($660
)
 

($859
)


Q2 2016 consolidated financial summary
Revenues (in millions; unaudited):
 
Three Months Ended June 30, 2016
 
Change from Q2 2015 to Q2 2016 (YoY)
 
Change from Q1 2016 to Q2 2016 (QoQ)
Revenues

$21,500

 
21
%
 
6
%
Constant currency revenues (YoY)

$21,535

 
25
%
 
N/A

Constant currency revenues (QoQ)

$21,121

 
N/A

 
5
%
Our revenues and constant currency revenues are reconciled in the financial tables following this release.
Costs and expenses
Cost of revenues, operating expenses, SBC expense, and depreciation, amortization, and impairment charges (in millions; unaudited):
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2016
Cost of revenues

$6,583

 

$8,130

Cost of revenues as % of revenues
37
%
 
38
%
 
 
 
 
Operating expenses (other than cost of revenues)

$6,319

 

$7,402

Operating expenses as % of revenues
36
%
 
34
%
 
 
 
 
SBC expense*

$1,132

 

$1,503

SBC related tax benefits

($234
)
 

($516
)
Depreciation, amortization, and impairment charges

$1,234

 

$1,490

*Excludes the expense for awards accounted for as stock-based compensation that we expect to ultimately settle in cash.
Supplemental information (in millions, except for headcount data; unaudited)
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2016
Cash, cash equivalents, and marketable securities

$69,780

 

$78,460

Net cash provided by operating activities

$7,096

 

$9,120

Capital expenditures

$2,515

 

$2,123

Free cash flow

$4,581

 

$6,997

Effective tax rate (ETR)
21
%
 
20
%
Headcount
57,148

 
66,575




Q2 2016 Google segment summary
Revenues and monetization
Google segment revenues by source (in millions; unaudited):
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2016
 
Change from Q2 2015 to Q2 2016 (YoY)
Google segment
 
 
 
 
 
Google websites

$12,402

 

$15,400

 
24
%
Google Network Members' websites
3,621

 
3,743

 
3
%
Google advertising revenues
16,023

 
19,143

 
19
%
Google other revenues
1,630

 
2,172

 
33
%
Google segment revenues

$17,653

 

$21,315

 
21
%
Paid clicks and cost-per-click information (unaudited):
 
Change from Q2 2015 to Q2 2016 (YoY)
 
Change from Q1 2016 to Q2 2016 (QoQ)
Aggregate paid clicks
29
 %
 
7
 %
Paid clicks on Google websites
37
 %
 
9
 %
Paid clicks on Google Network Members' websites
0
 %
 
(3
)%
 
 
 
 
Aggregate cost-per-click
(7
)%
 
(1
)%
Cost-per-click on Google websites
(9
)%
 
(2
)%
Cost-per-click on Google Network Members' websites
(8
)%
 
(2
)%
Traffic acquisition costs (TAC) and operating income
TAC to Google Network Members and distribution partners, operating income, and SBC expense (in millions; unaudited):
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2016
TAC to Google Network Members

$2,432

 

$2,623

TAC to Google Network Members as % of Google Network Members' revenues
67
%
 
70
%
TAC to distribution partners

$945

 

$1,352

TAC to distribution partners as % of Google website revenues
8
%
 
9
%
Total TAC

$3,377

 

$3,975

Total TAC as % of Google advertising revenues
21
%
 
21
%
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2016
Operating income, excluding SBC expense

$6,604

 

$8,314

SBC expense

$996

 

$1,320

Operating income

$5,608

 

$6,994

Supplemental information (in millions; unaudited)
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2016
Capital expenditures

$2,060

 

$2,056

Depreciation, amortization, and impairment

$1,189

 

$1,409



Q2 2016 Other Bets summary
Revenues and operating results
Other Bets revenues, operating loss, and SBC expense (in millions; unaudited):
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2016
Other Bets revenues

$74

 

$185

Operating loss, excluding SBC expense

($555
)
 

($709
)
SBC expense

$105

 

$150

Operating loss

($660
)
 

($859
)
Supplemental information (in millions; unaudited)
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2016
Capital expenditures

$232

 

$280

Depreciation, amortization, and impairment

$45

 

$81

Stock repurchase
In Q2 2016, we repurchased 2.0 million shares of Class C capital stock for an aggregate amount of $1.4 billion. Cash paid for repurchases totaled $1.6 billion during the quarter, which includes repurchases from Q1 2016 settled in Q2 2016. As of June 30, 2016, we completed all authorized share repurchases under our repurchase program.
Prior period recast
Prior period segment information has been recast to conform to the current period segment presentation. Consolidated financial information is not impacted.
Webcast and conference call information
A live audio webcast of our second quarter 2016 earnings release call will be available at http://abc.xyz/investor. The call begins today at 1:30 PM (PT) / 4:30 PM (ET). This press release, including the reconciliations of certain non-GAAP measures to their nearest comparable GAAP measures, is 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://abc.xyz/investor).
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, 2015, as updated by the Form 8-K filed on May 3, 2016, and our most recent Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, which are on file with the SEC and are available on our investor relations website at http://abc.xyz/investor 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 June 30, 2016.  All information provided in this release and in the attachments is as of July 28, 2016, 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 items 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 expense, 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.
Contact
Investor relations
investor-relations@abc.xyz
Media
press@abc.xyz



Alphabet Inc.
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts which are reflected in thousands and par value)
 
As of December 31, 2015
 
As of
June 30,
2016
 
 
 
(unaudited)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
16,549

 
$
13,627

Marketable securities
56,517

 
64,833

Total cash, cash equivalents, and marketable securities (including securities loaned of $4,531 and $4,426)
73,066

 
78,460

Accounts receivable, net of allowance of $296 and $294
11,556

 
11,686

Receivable under reverse repurchase agreements
450

 
500

Income taxes receivable, net
1,903

 
576

Prepaid revenue share, expenses and other assets
3,139

 
3,016

Total current assets
90,114

 
94,238

Prepaid revenue share, expenses and other assets, non-current
3,181

 
3,275

Non-marketable investments
5,183

 
5,820

Deferred income taxes
251

 
253

Property and equipment, net
29,016

 
31,413

Intangible assets, net
3,847

 
3,452

Goodwill
15,869

 
15,841

Total assets
$
147,461

 
$
154,292

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,931

 
$
1,716

Short-term debt
3,225

 
2,219

Accrued compensation and benefits
3,539

 
3,409

Accrued expenses and other current liabilities
4,768

 
4,502

Accrued revenue share
2,329

 
2,345

Securities lending payable
2,428

 
2,065

Deferred revenue
788

 
900

Income taxes payable, net
302

 
185

Total current liabilities
19,310

 
17,341

Long-term debt
1,995

 
1,984

Deferred revenue, non-current
151

 
151

Income taxes payable, non-current
3,663

 
4,135

Deferred income taxes
189

 
651

Other long-term liabilities
1,822

 
2,151

Total liabilities
27,130

 
26,413

Commitments and contingencies
 
 
 




Stockholders’ equity:
 
 
 
Convertible preferred stock, $0.001 par value per share, 100,000 shares authorized; no shares issued and outstanding
0

 
0

Class A and Class B common stock, and Class C capital stock and additional paid-in capital, $0.001 par value per share: 15,000,000 shares authorized (Class A 9,000,000, Class B 3,000,000, Class C 3,000,000); 687,348 (Class A 292,297, Class B 50,295, Class C 344,756) and 686,778 (Class A 294,686, Class B 48,921, Class C 343,171) shares issued and outstanding
32,982

 
34,293

Accumulated other comprehensive loss
(1,874
)
 
(1,151
)
Retained earnings
89,223

 
94,737

Total stockholders’ equity
120,331

 
127,879

Total liabilities and stockholders’ equity
$
147,461

 
$
154,292





Alphabet Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts; unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2016
 
2015
 
2016
Revenues
$
17,727

 
$
21,500

 
$
34,985

 
$
41,757

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenues
6,583

 
8,130

 
12,939

 
15,778

Research and development
2,789

 
3,363

 
5,542

 
6,730

Sales and marketing
2,080

 
2,415

 
4,145

 
4,802

General and administrative
1,450

 
1,624

 
3,087

 
3,137

Total costs and expenses
12,902

 
15,532

 
25,713

 
30,447

Income from operations
4,825

 
5,968

 
9,272

 
11,310

Other income (expense), net
131

 
151

 
288

 
(62
)
Income before income taxes
4,956

 
6,119

 
9,560

 
11,248

Provision for income taxes
1,025

 
1,242

 
2,114

 
2,164

Net income
$
3,931

 
$
4,877

 
$
7,446

 
$
9,084

Less: Adjustment Payment to Class C capital stockholders
522

 
0

 
522

 
0

Net income available to all stockholders
$
3,409

 
$
4,877

 
$
6,924

 
$
9,084

 
 
 
 
 
 
 
 
Basic net income per share of Class A and B common stock
$
4.99

 
$
7.11

 
$
10.15

 
$
13.23

Basic net income per share of Class C capital stock
$
6.51

 
$
7.11

 
$
11.68

 
$
13.23

 
 
 
 
 
 
 
 
Diluted net income per share of Class A and B common stock
$
4.93

 
$
7.00

 
$
10.03

 
$
13.01

Diluted net income per share of Class C capital stock
$
6.43

 
$
7.00

 
$
11.53

 
$
13.01





Alphabet Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions; unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2016
 
2015
 
2016
Operating activities
 
 
 
 
 
 
 
Net income
$
3,931

 
$
4,877

 
$
7,446

 
$
9,084

Adjustments:
 
 
 
 
 
 
 
Depreciation and impairment of property and equipment
1,011

 
1,271

 
1,949

 
2,426

Amortization and impairment of intangible assets
223

 
219

 
462

 
435

Stock-based compensation expense
1,132

 
1,503

 
2,335

 
2,997

Deferred income taxes
(221
)
 
(50
)
 
(150
)
 
364

Loss on marketable and non-marketable investments, net
17

 
14

 
33

 
294

Other
55

 
27

 
116

 
91

Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
 
 
 
 
Accounts receivable
(767
)
 
(835
)
 
(69
)
 
(17
)
Income taxes, net
1,123

 
1,409

 
1,950

 
1,680

Prepaid revenue share, expenses and other assets
19

 
(24
)
 
62

 
161

Accounts payable
(374
)
 
48

 
(398
)
 
(221
)
Accrued expenses and other liabilities
838

 
593

 
237

 
(471
)
Accrued revenue share
84

 
83

 
(121
)
 
(48
)
Deferred revenue
25

 
(15
)
 
(34
)
 
3

Net cash provided by operating activities
7,096

 
9,120

 
13,818

 
16,778

Investing activities
 
 
 
 
 
 
 
Purchases of property and equipment
(2,515
)
 
(2,123
)
 
(5,442
)
 
(4,551
)
Purchases of marketable securities
(20,568
)
 
(24,840
)
 
(33,126
)
 
(45,588
)
Maturities and sales of marketable securities
17,197

 
20,346

 
27,586

 
37,789

Purchases of non-marketable investments
(375
)
 
(262
)
 
(1,449
)
 
(583
)
Cash collateral related to securities lending
1,036

 
(106
)
 
(84
)
 
(363
)
Investments in reverse repurchase agreements
200

 
(150
)
 
250

 
(50
)
Acquisitions, net of cash acquired, and purchases of intangible assets
(78
)
 
(38
)
 
(142
)
 
(72
)
Net cash used in investing activities
(5,103
)
 
(7,173
)
 
(12,407
)
 
(13,418
)
Financing activities
 
 
 
 
 
 
 
Net payments related to stock-based award activities
(511
)
 
(803
)
 
(1,004
)
 
(1,610
)
Adjustment Payment to Class C capital stockholders
(47
)
 
0

 
(47
)
 
0

Repurchases of capital stock
0

 
(1,595
)
 
0

 
(3,693
)
Proceeds from issuance of debt, net of costs
3,393

 
1,797

 
6,698

 
5,753

Repayments of debt
(3,396
)
 
(2,839
)
 
(6,704
)
 
(6,801
)
Net cash used in financing activities
(561
)
 
(3,440
)
 
(1,057
)
 
(6,351
)
Effect of exchange rate changes on cash and cash equivalents
45

 
9

 
(248
)
 
69

Net increase (decrease) in cash and cash equivalents
1,477

 
(1,484
)
 
106

 
(2,922
)
Cash and cash equivalents at beginning of period
16,976

 
15,111

 
18,347

 
16,549

Cash and cash equivalents at end of period
$
18,453

 
$
13,627

 
$
18,453

 
$
13,627





Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures
The following table presents certain non-GAAP consolidated results before certain items (in millions, except share amounts which are reflected in thousands and per share amounts, unaudited):
 
Three Months Ended June 30, 2015
 
Three Months Ended June 30, 2016
 
GAAP Actual
 
Adjustments
 
Non-GAAP Results
 
GAAP Actual
 
Adjustments
 
Non-GAAP Results
Revenues
$
17,727

 
 
 
$
17,727

 
$
21,500

 
 
 
$
21,500

 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
6,583

 
$
163

(b) 
6,420

 
8,130

 
$
255

(b) 
7,875

Research and development
2,789

 
583

(b) 
2,206

 
3,363

 
739

(b) 
2,624

Sales and marketing
2,080

 
196

(b) 
1,884

 
2,415

 
238

(b) 
2,177

General and administrative
1,450

 
190

(b) 
1,260

 
1,624

 
271

(b) 
1,353

Income from operations
$
4,825

 
$
1,132

 
$
5,957

 
$
5,968

 
$
1,503

 
$
7,471

Operating margin (a)
27.2
%
 
 
 
33.6
%
 
27.8
%
 
 
 
34.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,132

(b) 
 
 
 
 
$
1,503

(b) 
 
 
 
 
(234
)
(c) 
 
 
 
 
(516
)
(c) 
 
Net income
$
3,931

 
$
898

 
$
4,829

 
$
4,877

 
$
987

 
$
5,864

Less: Adjustment Payment to Class C capital stockholders
522

 
(522
)
(d) 
0

 
0

 
0


0

Net income available to all stockholders
$
3,409

 
$
1,420

 
$
4,829

 
$
4,877

 
$
987

 
$
5,864

 
 
 
 
 
 
 
 
 
 
 
 
Diluted net income per share for Class A and B common stock
$
4.93

 
 
 
$
6.99

 
$
7.00

 
 
 
$
8.42

Diluted net income per share of Class C capital stock
$
6.43

 
 
 
$
6.99

 
$
7.00

 
 
 
$
8.42

Shares used in per share calculation - diluted
(e) 

 
 
 
690,878

 
696,847

 
 
 
696,847

(a) Operating margin is defined as income from operations divided by revenues.
Non-GAAP operating margin is defined as non-GAAP income from operations divided by revenues.
(b) To eliminate SBC expense, excluding expense related to awards that we expect to ultimately settle in cash.
(c) To eliminate income tax effects related to SBC, which includes the incremental benefits recognized resulting from the adoption of new accounting guidance beginning in Q1 2016.
(d) To eliminate Adjustment Payment to Class C capital stockholders.
(e) For Q2 2015, diluted shares used to calculate GAAP diluted EPS for Class A and B common stock and Class C capital stock were 343,190, 52,114, and 347,688, respectively. Diluted shares used to calculate non-GAAP diluted EPS for Class A and B common stock and Class C capital stock were 690,878.
Non-GAAP operating income and operating margin. We define non-GAAP operating income as income from operations excluding expenses related to SBC, and, as applicable, other special items. Non-GAAP operating margin is defined as non-GAAP operating income divided by revenues. We consider these non-GAAP financial measures to be useful metrics for management and investors because they exclude the effect of SBC expense, and as applicable, other special items so that Alphabet's management and investors can compare Alphabet's recurring core business operating results over multiple periods. For purposes of determining non-GAAP operating income, we define SBC as awards accounted for under FASB ASC Topic 718 that we expect to settle in stock. SBC expense does not include expenses related to awards that we expect to ultimately settle in cash. Alphabet's management believes that providing a non-GAAP financial measure that excludes SBC expense allows investors to make meaningful comparisons between Alphabet's recurring core business operating results and those of other companies, as well as providing Alphabet's management with an important tool for financial and operational decision making and for evaluating Alphabet's own recurring core business operating results over different periods of time. There are a number of limitations related to the use of non-GAAP operating income versus operating income calculated in accordance with GAAP. First, non-GAAP operating income excludes some costs, namely, SBC expense, that are recurring. SBC expense has been and will continue to be for the foreseeable future a significant recurring expense in Alphabet's business. Second, SBC is an important part of our employees' compensation. Third, the components of the costs that we exclude in our calculation of non-GAAP operating income may differ from the components that our peer companies exclude when they report their results of operations. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP operating income and evaluating non-GAAP operating income together with operating income calculated in accordance with GAAP.
Non-GAAP net income and diluted EPS. We define non-GAAP net income as net income excluding SBC expense, net of the SBC related tax benefits, and, as applicable, other special items less the related tax effects. The tax effects of such items are calculated based on the tax deductible portion related to SBC and, as applicable, other special items, and applying the entity-specific, U.S. federal and blended state tax rates.  We define non-GAAP diluted EPS as non-GAAP net income divided by total weighted average outstanding shares, on a fully-diluted basis. We consider these non-GAAP financial measures to be useful metrics for management and investors for the same reasons that Alphabet uses non-GAAP operating income and non-GAAP operating margin. However, in order to provide a complete picture of our recurring core business operating results, we exclude from non-GAAP net income and non-GAAP diluted EPS the SBC related tax benefits, and, as applicable, the tax effects of other special items. Without excluding these tax effects, investors would only see the gross effect that excluding these expenses had on our operating results. The same limitations described above regarding Alphabet's use of non-GAAP operating income and non-GAAP operating margin apply to our use of non-GAAP net income and non-GAAP diluted EPS. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from non-GAAP net income and non-GAAP diluted EPS and evaluating non-GAAP net income and non-GAAP diluted EPS together with net income and diluted EPS calculated in accordance with GAAP.




Reconciliation from net cash provided by operating activities to free cash flow (in millions, unaudited):
 
Three Months Ended June 30, 2016
Net cash provided by operating activities
$
9,120

Less: purchases of property and equipment
(2,123
)
Free cash flow
$
6,997

 
 
Net cash used in investing activities (a)
$
(7,173
)
 
 
Net cash used in financing activities
$
(3,440
)
(a) Includes purchases of property and equipment.
 
Free cash flow. We define free cash flow as net cash provided by operating activities less capital expenditures. We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business that, after the acquisition of property and equipment, including information technology assets and land and buildings, can be used for strategic opportunities, including investing in our business, making strategic acquisitions, and strengthening the balance sheet. Analysis of free cash flow also facilitates management's comparisons of our operating results to competitors' operating results. A limitation of using free cash flow versus the GAAP measure of net cash provided by operating activities as a means for evaluating Alphabet is that free cash flow does not represent the total increase or decrease in the cash balance from operations for the period because it reflects the cash used for capital expenditures during the period. Our management compensates for this limitation by providing information about our capital expenditures on the face of the statement of cash flows and under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K. Alphabet has computed free cash flow using the same consistent method from quarter to quarter and year to year.




Reconciliation from GAAP revenues to non-GAAP constant currency revenues (in millions, unaudited):
 
Three Months Ended June 30, 2016
 
Three Months Ended June 30, 2016
 
(using Q2'15's FX rates)
 
(using Q1'16's FX rates)
United Kingdom revenues (GAAP)
$
1,914

 
$
1,914

Exclude foreign exchange impact on Q2'16 revenues using Q2'15 rates
71

 
N/A

Exclude foreign exchange impact on Q2'16 revenues using Q1'16 rates
N/A

 
(21
)
Exclude hedging gains recognized in Q2'16
(37
)
 
(37
)
United Kingdom revenues excluding foreign exchange and hedging impact (Non-GAAP)
$
1,948

 
$
1,856

 
 
 
 
Rest of the world revenues (GAAP)
$
9,551

 
$
9,551

Exclude foreign exchange impact on Q2'16 revenues using Q2'15 rates
42

 
N/A

Exclude foreign exchange impact on Q2'16 revenues using Q1'16 rates
N/A

 
(280
)
Exclude hedging gains recognized in Q2'16
(41
)
 
(41
)
Rest of the world revenues excluding foreign exchange and hedging impact (Non-GAAP)
$
9,552

 
$
9,230

 
 
 
 
United States revenues (GAAP)
$
10,035

 
$
10,035

 
 
 
 
Constant currency revenues (Non-GAAP)
$
21,535

 
$
21,121

Prior period revenues, excluding hedging gains (Non-GAAP)
$
17,256

 
$
20,088

Constant currency revenue growth (Non-GAAP)
25
%
 
5
%
Non-GAAP constant currency revenues and growth. We define non-GAAP constant currency revenues as total revenues excluding the impact of foreign exchange rate movements and hedging activities, and use it to determine the constant currency revenue growth on year-on-year and quarter-on-quarter bases. Non-GAAP constant currency revenues are calculated by translating current quarter revenues using prior period exchange rates and excluding any hedging gains recognized in the current quarter. Constant currency revenue growth (expressed as a percentage) is calculated by determining the increase in current quarter revenues over prior period revenues, where current quarter international revenues are translated using prior period exchange rates and hedging benefits are excluded from revenues of both periods. We consider non-GAAP constant currency revenues and growth as useful metrics as they facilitate management's internal comparison to our historical performance because they exclude the effects of foreign currency volatility that are not indicative of our core operating results.




Other income (expense), net
The following table presents our other income (expense), net, (in millions, unaudited):
 
Three Months Ended
 
June 30,
 
2015
 
2016
Interest income
$
240

 
$
307

Interest expense
(26
)
 
(32
)
Foreign currency exchange losses, net
(99
)
 
(128
)
Gain (loss) on marketable securities, net
53

 
(9
)
Loss on non-marketable investments, net
(70
)
 
(5
)
Other
33

 
18

Other income (expense), net
$
131

 
$
151





Segment results
The following tables present our revenues, operating income, stock-based compensation, capital expenditures, and depreciation, amortization, and impairment by segment (in millions, unaudited):
 
Three Months Ended
 
June 30,
 
2015(4)
 
2016
Revenues:
 
 
 
Google
$
17,653

 
$
21,315

Other Bets
74

 
185

Total revenues
$
17,727

 
$
21,500

 
 
 
 
Operating income (loss):
 
 
 
Google
$
5,608

 
$
6,994

Other Bets
(660
)
 
(859
)
Reconciling items(1)
(123
)
 
(167
)
Total income from operations
$
4,825

 
$
5,968

 
 
 
 
Stock-based compensation(2):
 
 
 
Google
$
996

 
$
1,320

Other Bets
105

 
150

Reconciling items(1)
31

 
33

Total stock-based compensation
$
1,132

 
$
1,503

 
 
 
 
Operating income (loss), excluding stock-based compensation(2):
 
 
 
Google
$
6,604

 
$
8,314

Other Bets
(555
)
 
(709
)
Reconciling items(1)
(92
)
 
(134
)
Total income from operations, excluding stock-based compensation
$
5,957

 
$
7,471

 
 
 
 
Capital expenditures:
 
 
 
Google
$
2,060

 
$
2,056

Other Bets
232

 
280

Reconciling items(3)
223

 
(213
)
Total capital expenditures
$
2,515

 
$
2,123

 
 
 
 
Depreciation, amortization, and impairment:
 
 
 
Google
$
1,189

 
$
1,409

Other Bets
45

 
81

Total depreciation, amortization, and impairment
$
1,234

 
$
1,490

(1) 
Reconciling items are primarily related to corporate administrative costs and other miscellaneous items that are not allocated to individual segments.
(2) 
For purposes of segment reporting, we define SBC as awards accounted for under FASB ASC Topic 718 that we expect to settle in stock. SBC for segment reporting does not include expenses related to awards that we expect to ultimately settle in cash.
(3) 
Reconciling items are related to timing differences of payments as segment capital expenditures are on accrual basis while total capital expenditures shown on Consolidated Statements of Cash Flow are on cash basis and other miscellaneous differences.
(4) 
Segment information for Q2 2015 has been recast to conform to the current period segment presentation. Consolidated financial information is not impacted.




Revenues by source
The following tables present our revenues by revenue source (in millions, unaudited):
 
Three Months Ended
 
June 30,
 
2015
 
2016
Revenues:
 
 
 
Google websites
$
12,402

 
$
15,400

Google Network Members' websites
3,621

 
3,743

Google advertising revenues
16,023

 
19,143

Google other revenues
1,630

 
2,172

Google segment revenues
17,653

 
21,315

Other Bets revenues
74

 
185

Total revenues
$
17,727

 
$
21,500





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