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Google’s Operating Margin Narrows despite Improved Traffic Costs

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Apr. 30 2019, Published 9:33 a.m. ET

Alphabet’s operating margin shrank once again

One of the major concerns for Alphabet’s (GOOG) investors is that the company’s operating margin is getting squeezed. In the first quarter, the search-engine giant’s operating margin stood at 18.18% compared to 24.5% in the corresponding quarter in 2018. Even after excluding the $1.7 billion EU fine, Google’s operating margin would have been 22.8%, meaning it’s still getting squeezed.

One of the major drivers of Alphabet’s narrowing margins over the years has been the company’s surging traffic acquisition costs. These include the costs the company bears to make its search engine and other services the default on devices such as Apple’s.

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Google’s traffic acquisition costs stood at 22%

One of the bright spots in Alphabet’s first-quarter earnings was its falling traffic acquisition costs as a percentage of ad revenue. In the first quarter of 2019, Alphabet posted traffic acquisition costs of $6.86 billion, a rise of 9.1% YoY (year-over-year), the smallest increase in several quarters.

As a percentage of ad revenue, Google’s traffic acquisition costs stood at 22% in the first quarter of 2019 compared to 24% in the same quarter last year. Lately, though, other factors have also been hampering the tech giant’s operating margins.

Alphabet has been burning money on research and development. It spent $6.0 billion on research and development in the first quarter, a rise of 19.6% YoY.

Hefty European Commission antitrust fines have also been a drag on Alphabet’s bottom line in the last couple of years or so.

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