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ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

We expect general and administrative expenses will increase in dollar amount and may fluctuate as a percentage of revenues in 2017 and future periods.

Stock-Based Compensation

The following table presents stock-based compensation expense for awards we expect to settle in equity (in millions) for the periods presented:

Year Ended December 31, 2014 2015 2016

Stock-based compensation as a percentage of revenues 6.3% 6.9% 7.4%

Stock-based compensation related to awards we expected to settle in equity increased $1,500 million from 2015 to 2016 and $1,028 million from 2014 to 2015. These increases were primarily driven by headcount growth.

We estimate stock-based compensation expense related to awards we expect to settle in equity to be approximately $6.3 billion in 2017 and $8.3 billion thereafter related to stock-based awards outstanding as of December 31, 2016. These estimates do not include expense related to stock-based awards granted after December 31, 2016.

Consolidated Other Income (Expense), Net

The following table presents other income (expense), net, (in millions) for the periods presented:

Year Ended December 31, 2014 2015 2016

Other income (expense), net, as a percentage of revenues 1.1% 0.4% 0.5%

Other income (expense), net, increased $143 million from 2015 to 2016. This increase was primarily driven by an increase in interest income and decreased losses on non-marketable investments, partially offset by increased losses from our foreign currency transactions and impairments for certain assets.

Other income (expense), net, decreased $472 million from 2014 to 2015. This decrease was primarily related to a writedown of securities received in conjunction with the sale of a business as well as reduced gains on non-marketable investments as compared to 2014. These decreases were partially offset by an increase in interest income as a result of increased cash and fixed income investments.

The costs of our foreign exchange hedging activities recognized in other income (expense), net, are primarily a function of the notional amount of the option and forward contracts and their related duration, the movement of foreign exchange rates relative to the contract prices, the volatility of foreign exchange rates and forward points. As we began using foreign currency forward contracts to hedge our forecasted revenues in the fourth quarter of 2016, we expect the hedging costs expensed in other income (expense), net, will decrease in 2017 and future periods as a result of less option premiums paid.

Consolidated Provision for Income Taxes

The following table presents our provision for income taxes (in millions) and effective tax rate for the periods presented:

Year Ended December 31, 2014 2015 2016

Stock-based compensation

$

4,175

$

5,203

$

6,703

Other income (expense), net

$

763

$

291

$

434

Provision for income taxes

$

3,639

$

3,303

$

4,672

30

ALPHABET INC. | Annual Report

Effective tax rate 21.1% 16.8%

19.3%

Our provision for income taxes and our effective tax rate increased from 2015 to 2016, largely due to proportionately more earnings generated in jurisdictions that have higher statutory tax rates and discrete items in 2015 and 2016, partially offset by the stock-based compensation benefits recognized resulting from the adoption of Accounting Standards Update No. 2016-09 (ASU 2016-09).

PART II

ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

Our provision for income taxes and our effective tax rate decreased from 2014 to 2015, largely due to a discrete benefit recognized in 2015 as a result of the resolution of a multi-year U.S. tax audit related to prior years and proportionately more earnings generated in jurisdictions that have lower statutory tax rates.

Our future effective tax rate could be adversely affected by earnings being lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates, the net gains and losses recognized by legal entities on certain hedges and related hedged intercompany and other transactions under our foreign exchange risk management program, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.

Quarterly Results of Operations

The following tables presenting our quarterly results of operations should be read in conjunction with the consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K. We have prepared the unaudited information on the same basis as our audited consolidated financial statements. Our operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year.

The following table presents our unaudited quarterly results of operations for the eight quarters ended December 31, 2016. This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our consolidated financial position and operating results for the quarters presented. Both seasonal fluctuations in internet usage, advertising expenditures and underlying business trends such as traditional retail seasonality have affected, and are likely to continue to affect, our business. Commercial queries typically increase significantly in the fourth quarter of each year. These seasonal trends have caused, and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in sequential revenue growth rates.

Mar 31, 2015

$ 17,258 6,356 2,065 12,811 157

1,089 0 $ 5.16

$ 5.10

Jun 30, 2015

$ 17,727 6,583 2,080 12,902 131

1,025 522 $ 4.99

$ 4.93

Quarter Ended

Sep 30, Dec 31, Mar 31, Jun 30, 2015 2015 2016 2016

(In millions, except per share amounts)

Sep 30, 2016

$ 22,451 8,699 2,565 16,684 278

984 00

$ 7.36 $ 7.73 $ 7.25 $ 7.56

(unaudited)

Dec 31, 2016

$ 26,064 10,661 3,118 19,425 218

Consolidated Statements of Income Data:

Revenues Cost of revenues Sales and marketing

Total costs and expenses Other income (expense), net

Provision for income taxes

Less: Adjustment Payment to Class C capital stockholders

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

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

$ 18,675 7,037 2,223 13,967 183

912 0 $ 5.80

$ 5.73

$ 21,329 8,188 2,679 15,949

$ 20,257 7,648 2,387 14,915

$ 21,500 8,130 2,415 15,532 151

Costs and expenses:

Research and development

2,753

2,789

3,230

3,510

3,367

3,363

3,596

3,622

General and administrative

1,637

1,450

1,477

1,572

1,513

1,624

1,824

2,024

Income from operations

4,447

4,825

4,708

5,380

5,342

5,968

5,767

6,639

(180) 277

(213) 922 000

Income from continuing operations before income taxes

4,604

4,956

4,891

5,200

5,129

6,119

6,045

6,857

1,242

1,524

Net income

$

3,515

$

3,931

$

3,979

$

4,923

$

4,207

$

4,877

$

5,061

$

5,333

Net income available to all stockholders

$

3,515

$

3,409

$

3,979

$

4,923

$

4,207

$

4,877

$

5,061

$

5,333

$ 7.16 $ 6.12 $ 7.11 $ 7.06 $ 6.02 $ 7.00

Basic net income per share of Class C capital stock

$

5.16

$

6.51

$

5.80

$

7.16

$

6.12

$

7.11

$

7.36

$

7.73

Diluted net income per share of Class C capital stock

$

5.10

$

6.43

$

5.73

$

7.06

$

6.02

$

7.00

$

7.25

$

7.56