Google continues to pay up to hang onto its title as the king of search, but Wall Street doesn't seem too fazed by that.
After Thursday's closing bell, Alphabet Inc. (GOOGL) reported stronger-than-expected results across the board for the third quarter. Alongside growing profits and revenue, the company also reported a sharp increase in traffic acquisition costs (TAC), or what it pays to partners to carry advertisements. During the quarter, TAC grew to $5.5 billion, a 32% increase from a year ago and higher than analysts' estimated $5.24 billion.
The company has seen TAC grow steadily in recent years as more and more users consume content on mobile. That metric includes Apple's hefty deal with Apple Inc. (AAPL) , wherein it pays $3 billion annually to remain the default search engine on iPhones. Additionally, Apple last month ditched Bing in favor of Google as the search engine for Siri and Spotlight.
On an earnings call with investors late Thursday, Alphabet CFO Ruth Porat attributed the increase in TAC to greater usage on mobile devices and changes in partner agreements. Porat didn't elaborate on what any of those changes might entail. She added that she expects TAC to continue to accelerate, mostly because programmatic and mobile ads carry higher TAC, due to searches being "channeled through paid access points."
"We continue to stress the impact from the shift to mobile," Porat explained. "We do it expect it to increase some from here."
Wall Street has grown increasingly concerned that Google will end up paying more and more money to get traffic, which could end up weighing on its profit margins. Last quarter, those concerns ended up overshadowing the company's otherwise bright second quarter results.
That doesn't seem to be the case this time around, however. Shares of Alphabet were climbing 2.7% to $1,019.00 in after-hours trading on Thursday, briefly hitting an all-time high. The stock is up more than 25% so far this year.
For now, Alphabet's rising TAC seem to be offset by the fact that its mobile ad business continues to grow. Aggregate paid clicks, which include clicks on ads served on Google sites and Google Network sites, surged 47% year-on-year, while operating margins increased annually to 28%, up from 26% one year ago. Profit margins of 24% were the highest since 2013, according to Reuters.
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