Google parent company Alphabet Inc. (GOOG, Financial) (GOOGL, Financial) reported second-quarter earnings that saw the company’s profit shrink due to the $2.74 billion fine by European antitrust regulators. But the giant continued its double-digit revenue growth streak, reaching $26 billion in revenues during the quarter compared to $21.5 billion a year ago, 21% growth.
Alphabet made it easier for investors to understand what went on by summarizing its results including and excluding the impact of the fine in its earnings release. The $2.7 billion fine took a huge bite out of operating income and per-share earnings numbers, but since this will be a one-time headache for the company and since the company is sitting on a cash pile of $94.713 billion as of the end of the second quarter, Alphabet will easily shrug the problem off its shoulders.
But Alphabet had some other problems show up during the quarter, which were connected to increasing costs. During the second quarter, Alphabet’s cost of revenue was $10.373 billion, accounting for 39.88% of its overall revenue and higher than its cost of revenue in the same quarter last year. Despite garnering more and more clicks from mobile platforms and emerging markets, Google's cost per click continues to decrease.
During the second quarter, aggregate cost per click declined 23% compared to last year, while paid clicks increased 52%. Google’s traffic acquisitions cost as a percentage of advertising revenue was 22% during the quarter, increasing 1% from last year. Google is spending more to drive traffic, which could force it to take a hit on its operating numbers in the future because mobile platforms and developing markets are where most of the future growth is going to come from.
“We do continue to expect Sites TAC to increase, but our focus remains on growing profit dollars and I go back to my comment which is really pleased with the strength of our mobile business, which is benefiting profit dollars even as the TAC percentage increases,“Â Alphabet Chief Financial Officer Ruth Porat said.
Although the possibility of a shrinking operating margin might remain a concern for some investors, that worry should begin to disappear if Alphabet continues its double-digit growth rate. Despite a 28% increase in traffic acquisition costs, Google managed to increase aggregate paid clicks by 52% during the quarter, a good indication there is enough demand in the market.
Disclosure: I have no positions in the stock mentioned above and have no intention of initiating a position in the next 72 hours.
