Chart 8: Google ex-FX Y/Y growth trends 30% ro % I 25% I 24% 9 9 % 20% 1 20% jy “12% 24% 22%, I 20% te 15% 1 I , I I 10% 1 , 5% I I I I 0% eu ae eu 2 £1 = 2 ~ ee = S & &$€ F< 2&1 & FS F< &B BIS SG l ae NN I ise) + ™ Total Google Revenue Y/Y (ex-FX) ~ m Google Website Y/Y (ex-FX) Source: Company reports, BofA Merrill Lynch Global Research For core margins, we assume y/y contraction through 3Q17, after which we model a slight uptick in 4Q17. For the year, we assume core Google margins contract 50bps to 46.1%. In terms of blended Alphabet non-GAAP operating margins, we assume 7Obps of y/y contraction to 40.7% in 2017, but won't be surprised if better cost discipline (particularly in Other Bets) drives more stable y/y trends. Table 9: Core Google non-GAAP operating margin forecast 1016 2016 3Q16 4Q16 1Q17E 2Q17E 3Q17E 4Q17E 1Q18E 2018E 301 8E 4Q18E Core Google non-GAAP operating margin 46.5% 47.9% 46.5% 45.5% | 45.8% 46.5% 45.6% 46.4% 45.6% 46.5% 454% 46.3% YN Change 1.4% 1.6% -1.0% -1.5%| -0.7% -1.4% -0.9% 0.9% 0.2% -01% 02% -0.1% Source: Company, BofA Merrill Lynch Global Research Biggest 1Q issues/risks: - Deceleration in Google Website revenue: There could be modest revenue pressure due to YouTube boycott impact, and/or ad shift to Facebook. One SEM suggested a modest uptick in advertising spend on maps, which could be a positive in 2017. ¢ TAC to distribution partners: Rising TAC rate (Apple, Samsung} could mitigate potential gross revenue upside in the higher margin mobile search segment. ¢ Growth investments could drag on margins: Investments in Google Cloud, hardware, and YouTube could be higher than we expect, which could negatively impact core Google margins and raise concerns on long-term sustainable margin levels. * YouTube/Display Network commentary: While we do not expect full resolution on the YouTube/Display Network issues, management’s tone will likely impact expectations for timing of a fix, corresponding costs, magnitude of the boycott