Declining operating margins

Alphabet (GOOGL) is gearing up to report its results for the fourth quarter of 2018 on February 4. In the third quarter, the company made a profit of $9.2 billion. But Alphabet’s operating margin in the third quarter was down to 25% from 28% a year earlier. It was the same case in the second quarter when the company’s operating margin narrowed to 24% from 26% a year earlier. In the first quarter, Alphabet’s operating margin dipped to 22% from 27% a year earlier. Alphabet’s operating margin was 24% in the fourth quarter of 2017, also down from 25% a year earlier.

Did Alphabet’s Profitability Improve in Q4?

Rising costs putting pressure on margins

Soaring traffic acquisition costs and rising product development and marketing expenditures have weighed on Alphabet’s operating margins in recent years. Alphabet’s operating expenses increased 27% YoY to $25.4 billion in the third quarter of 2018. But Alphabet is not the only major technology company whose operating margin has been under pressure. At Facebook (FB), operating margin narrowed to 42% in the third quarter from 50% a year earlier. This contraction followed a 53% YoY rise in Facebook’s operating expenses in the quarter. Amazon (AMZN), Twitter (TWTR), and Yelp (YELP) reported operating expense increases of 22%, 14%, and 7.0% YoY, respectively, in the third quarter.

$6.8 billion profit before special tax provision

Despite shrinking operating margins, Alphabet has been reporting higher profits thanks to growing revenue. Alphabet’s $9.2 billion profit in the third quarter of 2018 jumped from $6.7 billion a year earlier. Discounting a large tax provision, Alphabet posted a profit of $6.8 billion in the fourth quarter of 2017.

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