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Alphabet(GOOGL) - 2023 Q4 - Annual Report
GOOGLAlphabet(GOOGL)2024-01-30 16:00

AI and Innovation - Alphabet has invested over 150billioninresearchanddevelopmentoverthepastfiveyearstoinnovateandbuildnewproductsandfeatures[12]−GoogleDeepMind′sAlphaFoldsystemsolveda50−year−oldproteinfoldingchallengeandhasopen−sourced200millionproteinstructurestothescientificcommunity[15]−InDecember2023,AlphabetlaunchedGemini,itsmostcapableandgeneralAImodel,designedtobemultimodalandoperateacrosstext,code,audio,images,andvideo[16]−Google′sVertexAIplatformenablesdeveloperstotrain,tune,augment,anddeployapplicationsusinggenerativeAImodelsandservices[17]−PerformanceMax,anAI−poweredadvertisingtool,automaticallyproducesandrunshighlyeffectiveadcampaignsacrossGoogle′sproperties[19]−Google′sPixeldevicesincorporateAIcomputedirectlyintothedevice,offeringfeatureslikeBestTake,MagicEditor,andAudioMagicEraser[20]−Google′sAI−drivenadvertisingtools,suchasPerformanceMaxandProductStudio,helpadvertisersfinduntappedandincrementalconversionopportunities[25]−VertexAIplatformenablesdeveloperstotrain,tune,anddeploygenerativeAImodels,whileDuetAIforGoogleCloudassistsinsoftwaredevelopmentandoperations[27]−AlphabetisexpandinginvestmentsinAI,includinggenerativeAI,toenhanceproductsandservices,butfacescompetitionanddependencyonthird−partyinfrastructure[39]−AI−relatedeffortsmayleadtoriskssuchasharmfulcontent,inaccuracies,discrimination,andintellectualpropertyinfringement,potentiallyresultinginregulatoryactionandreputationalharm[49]CloudServices−GoogleCloudhelpscustomersimproveproductivity,reducecosts,andunlocknewgrowthengines,withAI−optimizedinfrastructureandmatureAIplatforms[15]−GoogleCloudgeneratesrevenuefromconsumption−basedfeesandsubscriptionsforinfrastructure,platform,collaborationtools,andothercloudservices[26]−GoogleCloudrevenuesincreasedby150 billion in research and development over the past five years to innovate and build new products and features[12] - Google DeepMind's AlphaFold system solved a 50-year-old protein folding challenge and has open-sourced 200 million protein structures to the scientific community[15] - In December 2023, Alphabet launched Gemini, its most capable and general AI model, designed to be multimodal and operate across text, code, audio, images, and video[16] - Google's Vertex AI platform enables developers to train, tune, augment, and deploy applications using generative AI models and services[17] - Performance Max, an AI-powered advertising tool, automatically produces and runs highly effective ad campaigns across Google's properties[19] - Google's Pixel devices incorporate AI compute directly into the device, offering features like Best Take, Magic Editor, and Audio Magic Eraser[20] - Google's AI-driven advertising tools, such as Performance Max and Product Studio, help advertisers find untapped and incremental conversion opportunities[25] - Vertex AI platform enables developers to train, tune, and deploy generative AI models, while Duet AI for Google Cloud assists in software development and operations[27] - Alphabet is expanding investments in AI, including generative AI, to enhance products and services, but faces competition and dependency on third-party infrastructure[39] - AI-related efforts may lead to risks such as harmful content, inaccuracies, discrimination, and intellectual property infringement, potentially resulting in regulatory action and reputational harm[49] Cloud Services - Google Cloud helps customers improve productivity, reduce costs, and unlock new growth engines, with AI-optimized infrastructure and mature AI platforms[15] - Google Cloud generates revenue from consumption-based fees and subscriptions for infrastructure, platform, collaboration tools, and other cloud services[26] - Google Cloud revenues increased by 6.8 billion from 2022 to 2023, driven by growth in Google Cloud Platform and Google Workspace offerings[120] - Google Cloud revenues include consumption-based fees and subscriptions for infrastructure, platform, and AI offerings such as Vertex AI and Duet AI[212] - Google Cloud operating income improved by 3.6billion,turninga3.6 billion, turning a 1.9 billion loss in 2022 into a 1.7billionprofitin2023[137]−Alphabet′sGoogleCloudbusinessisinvestingheavilyinAIplatformsandmodels,butfacescompetitivepricinganddeliverymodels[40]AdvertisingandRevenue−GoogleServicesgeneratesrevenueprimarilythroughperformanceandbrandadvertisingonGoogleSearch,YouTube,andGoogleNetworkproperties[25]−Google′sAI−drivenadvertisingtools,suchasPerformanceMaxandProductStudio,helpadvertisersfinduntappedandincrementalconversionopportunities[25]−Alphabetgeneratedover751.7 billion profit in 2023[137] - Alphabet's Google Cloud business is investing heavily in AI platforms and models, but faces competitive pricing and delivery models[40] Advertising and Revenue - Google Services generates revenue primarily through performance and brand advertising on Google Search, YouTube, and Google Network properties[25] - Google's AI-driven advertising tools, such as Performance Max and Product Studio, help advertisers find untapped and incremental conversion opportunities[25] - Alphabet generated over 75% of its 2023 revenue from online advertising, with risks tied to ad-blocking technologies and macroeconomic conditions[39] - Google Search & other revenues increased by 12.6 billion from 2022 to 2023, driven by growth in search queries, advertiser spending, and improvements in ad formats[114] - YouTube ads revenues increased by 2.3billionfrom2022to2023,drivenbyincreasedspendingbyadvertisers[115]−GoogleNetworkrevenuesdecreasedby2.3 billion from 2022 to 2023, driven by increased spending by advertisers[115] - Google Network revenues decreased by 1.5 billion from 2022 to 2023, primarily due to a decrease in Google Ad Manager and AdSense revenues[115] - Advertising revenues are recognized when a user engages with the advertisement for performance ads, and when the ad is displayed for brand ads[209] Financial Performance - Consolidated revenues increased by 9% year-over-year to 307.4billion,drivenbyan8307.4 billion, driven by an 8% increase in Google Services revenues (19.0 billion) and a 26% increase in Google Cloud revenues (6.8billion)[109]−Operatingincomeroseby136.8 billion)[109] - Operating income rose by 13% year-over-year to 84.3 billion, with operating margin improving to 27% from 26%[109] - Net income increased by 23% year-over-year to 73.8billion,withdilutedEPSgrowing2773.8 billion, with diluted EPS growing 27% to 5.80[109] - Cost of revenues increased by 6% year-over-year to 133.3billion,primarilyduetohighercontentacquisitioncosts,compensationexpenses,andTAC[109]−Operatingexpensesgrewby10133.3 billion, primarily due to higher content acquisition costs, compensation expenses, and TAC[109] - Operating expenses grew by 10% year-over-year to 89.8 billion, driven by increased compensation expenses and office space optimization charges[109] - The company repurchased 62.2billionworthofClassAandClassCsharesin2023[112]−Operatingcashflowfor2023was62.2 billion worth of Class A and Class C shares in 2023[112] - Operating cash flow for 2023 was 101.7 billion, while capital expenditures totaled 32.3billion,primarilyfortechnicalinfrastructureinvestments[112]−GoogleServicesoperatingincomeincreasedby32.3 billion, primarily for technical infrastructure investments[112] - Google Services operating income increased by 13.2 billion from 2022 to 2023, driven by revenue growth and cost reductions[136] - Other Bets operating loss decreased by 541millionduetorevenuegrowthandreducedcompensationliabilities[138]−Alphabet′stotaloperatingincomeincreasedfrom541 million due to revenue growth and reduced compensation liabilities[138] - Alphabet's total operating income increased from 74.8 billion in 2022 to 84.3billionin2023[135]−Alphabet′scash,cashequivalents,andshort−termmarketablesecuritiestotaled84.3 billion in 2023[135] - Alphabet's cash, cash equivalents, and short-term marketable securities totaled 110.9 billion as of December 31, 2023[143] - Net cash provided by operating activities increased from 91.5billionin2022to91.5 billion in 2022 to 101.7 billion in 2023[146] - Capital expenditures were 32.3billionin2023,withincreasedinvestmentsintechnicalinfrastructuretosupportAIgrowth[152]−Alphabetrepurchased528millionsharesfor32.3 billion in 2023, with increased investments in technical infrastructure to support AI growth[152] - Alphabet repurchased 528 million shares for 62.2 billion in 2023, with 36.3billionremaininginthesharerepurchaseprogram[155]−Theeffectivetaxratedecreasedfrom15.936.3 billion remaining in the share repurchase program[155] - The effective tax rate decreased from 15.9% in 2022 to 13.9% in 2023 due to tax rule changes[142] - Alphabet's operating lease expenses increased from 3.7 billion in 2022 to 4.5billionin2023[153]−EuropeanCommissionfinesimposedonGoogletotaled€8.2billion(4.5 billion in 2023[153] - European Commission fines imposed on Google totaled €8.2 billion (9.5 billion) across 2017, 2018, and 2019, with the 2018 fine reduced to €4.1 billion in 2022[158] - Income taxes payable as of December 31, 2023, amounted to 4.2billion,includinga4.2 billion, including a 2.1 billion short-term transition tax payable under the U.S. Tax Cuts and Jobs Act[159] - Material purchase commitments and other contractual obligations totaled 45.9billionasofDecember31,2023,with45.9 billion as of December 31, 2023, with 31.6 billion being short-term[160] - A 10% adverse foreign currency exchange rate change would result in an adverse effect on income before taxes of 503millionasofDecember31,2023[169]−Theestimatedone−daylossinfairvalueofmarketabledebtsecuritiesduetointerestratefluctuationswas503 million as of December 31, 2023[169] - The estimated one-day loss in fair value of marketable debt securities due to interest rate fluctuations was 296 million as of December 31, 2023[173] - The company changed the estimated useful life of servers and certain network equipment to six years, effective fiscal year 2023[167] - Long-term taxes payable primarily related to uncertain tax positions amounted to 6.3billionasofDecember31,2023[159]−Thecompanyusesforeigncurrencyforwardandoptioncontractstohedgeagainstforeignexchangerisks,witha106.3 billion as of December 31, 2023[159] - The company uses foreign currency forward and option contracts to hedge against foreign exchange risks, with a 10% weakening of the U.S. dollar reducing AOCI by 1.5 billion as of December 31, 2023[169] - The company's Corporate Treasury investment strategy focuses on preserving capital and maintaining liquidity, primarily investing in debt securities[170] - The company records compensation expense based on estimated payouts from performance fees, which may require the use of unobservable inputs[163] - Marketable equity securities increased from 5.2billionin2022to5.2 billion in 2022 to 6.0 billion in 2023, with a hypothetical 10% adverse price change potentially decreasing fair value by 597million[174]−Non−marketableequitysecuritiescarryingvalueslightlyincreasedfrom597 million[174] - Non-marketable equity securities carrying value slightly increased from 28.5 billion in 2022 to 28.8billionin2023,withvaluationssubjecttosignificantrisksduetolackofmarketdata[174]−Equitymethodinvestmentsremainedstableatapproximately28.8 billion in 2023, with valuations subject to significant risks due to lack of market data[174] - Equity method investments remained stable at approximately 1.7 billion as of December 31, 2022 and 2023, with potential impairment risks if carrying value exceeds fair value[174] - Total revenues increased from 257.637billionin2021to257.637 billion in 2021 to 307.394 billion in 2023, representing a growth of approximately 19.3% over two years[195] - Net income rose from 76.033billionin2021to76.033 billion in 2021 to 73.795 billion in 2023, with a dip in 2022 to 59.972billion[195]−Totalassetsgrewfrom59.972 billion[195] - Total assets grew from 365.264 billion in 2022 to 402.392billionin2023,anincreaseof10.2402.392 billion in 2023, an increase of 10.2%[193] - Cash and cash equivalents increased from 21.879 billion in 2022 to 24.048billionin2023,ariseof9.924.048 billion in 2023, a rise of 9.9%[193] - Research and development expenses increased from 31.562 billion in 2021 to 45.427billionin2023,reflectinga43.945.427 billion in 2023, reflecting a 43.9% growth over two years[195] - Total stockholders' equity grew from 256.144 billion in 2022 to 283.379billionin2023,anincreaseof10.6283.379 billion in 2023, an increase of 10.6%[193] - Comprehensive income increased from 53.992 billion in 2022 to 76.996billionin2023,asignificantriseof42.676.996 billion in 2023, a significant rise of 42.6%[197] - Marketable securities decreased from 91.883 billion in 2022 to 86.868billionin2023,adeclineof5.586.868 billion in 2023, a decline of 5.5%[193] - Accounts receivable, net increased from 40.258 billion in 2022 to 47.964billionin2023,ariseof19.147.964 billion in 2023, a rise of 19.1%[193] - Diluted net income per share increased from 4.56 in 2022 to 5.80in2023,reflectinga27.25.80 in 2023, reflecting a 27.2% growth[195] - Net income for 2023 was 73.795 billion, an increase from 59.972billionin2022[202]−Netcashprovidedbyoperatingactivitiesin2023was59.972 billion in 2022[202] - Net cash provided by operating activities in 2023 was 101.746 billion, up from 91.495billionin2022[202]−Depreciationexpenseforpropertyandequipmentin2023was91.495 billion in 2022[202] - Depreciation expense for property and equipment in 2023 was 11.946 billion, compared to 13.475billionin2022[202]−Stock−basedcompensationexpensein2023was13.475 billion in 2022[202] - Stock-based compensation expense in 2023 was 22.460 billion, up from 19.362billionin2022[202]−Thecompanyadjustedtheestimatedusefullifeofserversfromfourtosixyears,reducingdepreciationexpenseby19.362 billion in 2022[202] - The company adjusted the estimated useful life of servers from four to six years, reducing depreciation expense by 3.9 billion and increasing net income by 3.0billionin2023[207]−Netcashusedininvestingactivitiesin2023was3.0 billion in 2023[207] - Net cash used in investing activities in 2023 was 27.063 billion, compared to 20.298billionin2022[202]−Repurchasesofstockin2023amountedto20.298 billion in 2022[202] - Repurchases of stock in 2023 amounted to 61.504 billion, up from 59.296billionin2022[202]−Stock−basedcompensationprimarilyconsistsofAlphabetrestrictedstockunits(RSUs),withsharesissuednetofapplicablestatutoryincometaxwithholding,resultinginfewersharesissuedthanoutstandingRSUs[219]−AdvertisingandpromotionalexpensesfortheyearsendedDecember31,2021,2022,and2023totaledapproximately59.296 billion in 2022[202] - Stock-based compensation primarily consists of Alphabet restricted stock units (RSUs), with shares issued net of applicable statutory income tax withholding, resulting in fewer shares issued than outstanding RSUs[219] - Advertising and promotional expenses for the years ended December 31, 2021, 2022, and 2023 totaled approximately 7.9 billion, 9.2billion,and9.2 billion, and 8.7 billion, respectively[220] - Performance fees are compensation arrangements based on realized returns from certain investments, recorded as a component of OI&E[221] - Fair value measurements are classified into three levels based on the observability of inputs: Level 1 (observable inputs), Level 2 (quoted prices for similar instruments), and Level 3 (unobservable inputs)[223] - Financial instruments include cash, cash equivalents, marketable and non-marketable securities, derivative financial instruments, and accounts receivable[224] - Credit risk is managed through timely assessment of counterparty creditworthiness, credit limits, and collateral management, with accounts receivable typically unsecured and derived from global customers[225] - Marketable securities are classified as available-for-sale, carried at fair value, and unrealized gains and losses are reported net of taxes as a component of stockholders' equity[227] - Non-marketable securities primarily consist of equity securities, with adjustments based on observable price changes in orderly transactions for identical or similar investments[229] - Property and equipment are stated at cost less accumulated depreciation, with depreciation recorded using the straight-line method over the estimated useful lives of the assets[237] - Goodwill is allocated to reporting units based on expected benefits from business combinations and tested for impairment at least annually[238] - FASB issued ASU 2023-07 effective for annual periods beginning January 1, 2024, and interim periods beginning January 1, 2025, with early adoption permitted[245] - FASB issued ASU 2023-09 effective for annual periods beginning January 1, 2025, with early adoption permitted[245] - Certain amounts in prior periods have been reclassified to conform with current period presentation[246] Regulatory and Legal Risks - Alphabet faces intense competition across multiple sectors, including search engines, advertising platforms, AI services, and digital content providers[29] - Alphabet is subject to evolving regulations in areas like AI, data privacy, and sustainability, which could impact business operations and costs[34] - Alphabet faces risks from supply chain disruptions, including raw material shortages, price increases, and longer lead times[45] - Alphabet's devices, including smartphones and wearables, face intense competition and may have adverse effects on consolidated margins[40] - Alphabet's investments in new businesses, products, and technologies are inherently risky and may not result in adequate returns[40] - Alphabet's revenue growth rate could decline due to changes in advertiser spending, competition, and shifts to lower-priced products[40] - Alphabet's operating margins may face downward pressure from increasing regulations, competition, and costs[42] - Alphabet's intellectual property rights are valuable but face risks from inadequate protection and potential loss of trademark value[42] - Alphabet's brands could be negatively affected by reputational issues, data privacy concerns, and product performance failures[42] - Alphabet's information technology systems are vulnerable to disruptions from natural disasters, cyberattacks, and geopolitical tensions[45] - The company faces risks if its products and services are not widely adopted across evolving platforms and devices, including desktops, mobile phones, wearables, and voice-activated speakers[47] - Significant resources are being devoted to developing and supporting products across multiple platforms and devices, with failure to attract new manufacturers and users potentially harming business[48] - Data privacy and security concerns, including potential breaches and improper disclosure of user data, could harm the company's reputation and financial condition[49] - The company regularly experiences cyber attacks and unauthorized access attempts, with evolving threats potentially leading to significant legal and financial risks[49] - Investments in safety and security aim to combat misuse of services and unauthorized access to user data, though not all incidents may be detected or remediated[51] - Problematic content, including low-quality user-generated content and web spam, could harm the company's reputation and deter users from its platforms[51] - The company's business depends on unimpeded internet access, with potential restrictions or increased costs by internet access providers posing risks to user and advertiser relationships[52] - Compliance with new and changing laws and regulations, particularly in data privacy, competition, and AI, could result in substantial costs and altered business practices[53] - Google faces antitrust lawsuits and regulatory challenges, including a December 2023 verdict in Epic Games v. Google finding antitrust violations related to Google Play's billing practices, with potential remedies to be determined in 2024[56] - The company is subject to evolving AI regulations, such as the EU AI Act and the U.S. Executive Order on AI, which could impose transparency requirements and regulatory actions on AI development and use[54] - Alphabet is under scrutiny for data privacy and protection, with laws like GDPR and U.S. state privacy laws imposing significant obligations and potential fines for non-compliance[56] - The EU's Digital Markets Act may require Alphabet to obtain user consent for data combination and share anonymized data with competitors, impacting its business practices[57] - Alphabet faces intellectual property claims, including patent and copyright infringement lawsuits, which could result in costly damages, licensing agreements, or restrictions on product offerings[58] - The company is subject to ESG-related regulations and expectations, which may require significant investments and could harm its reputation if goals are not met[59] - Alphabet is exposed to tax-related risks, including potential changes in tax rates, new tax legislation, and audits that could impact its financial condition[61] - The company's share repurchase program could increase stock price volatility and reduce cash reserves, with no guarantee of enhancing long-term stockholder value[62] Sustainability and ESG - Alphabet aims to achieve net-zero emissions across operations and value chain by 2030, targeting a 50% reduction in Scope 1, 2, and 3 emissions compared to 2019 levels[31] - Alphabet plans to transition to 24/7 carbon-free energy (CFE) on every grid where it operates by 2030, despite challenges in renewable energy availability[31] - The company is subject to ESG-related regulations and expectations, which may require significant investments and could harm its reputation if goals are not met[59] Workforce and Diversity - Alphabet employs 182,502 people as of December 31, 2023, with a focus on diversity, equity, and inclusion in its workforce[33] - The company recorded 2.1billioninemployeeseverancechargesand2.1 billion in employee severance charges and 1.8 billion in office space exit charges during 2023[110] International Operations - Alphabet's international operations accounted for approximately 53% of consolidated revenues in 2023[46] - A 10% adverse foreign currency exchange rate change would result in an adverse effect on income before taxes of 503millionasofDecember31,2023[169]−Thecompanyusesforeigncurrencyforwardandoptioncontractstohedgeagainstforeignexchangerisks,witha10503 million as of December 31, 2023[169] - The company uses foreign currency forward and option contracts to hedge against foreign exchange risks, with a 10% weakening of the U.S. dollar reducing AOCI by 1.5 billion as of December 31, 2023[169] Product and Service Offerings - Google Workspace and Duet AI enhance productivity with features like Smart Reply, Smart Compose, and malware protection in Gmail, supporting secure hybrid and remote work[27] - Google subscriptions, platforms, and devices revenues increased by $5.6 billion from 2022 to 2023, driven by growth in YouTube subscriptions and Pixel device sales[119] - Google subscriptions, platforms, and devices revenues include