Google has filed its Form 10-K for the fiscal year ending 2006, and there are some interesting tidbits in there. First off, the company's good financial performance over the past several yearsgoing from revenues of $439.5 million in 2002 to $10.6 billion in 2006has resulted in a massive war chest. Google's cash and short-term investments amounted to over $11.2 billion at the end of 2006. That's a 433 percent increase from 2004's $2.1 billion, and there is little to indicate that the growth party will end any time soon.

Advertising continues to be the engine pulling Google's money train, accounting for 99 percent of its revenues. 60 percent of ad revenues come from Google's own web sites, while the bulk of the rest comes from Google Network web sites. The remaining 1 percent comes from licensing deals. Traffic acquisition costs are about 31.5 percent of its advertising revenues.

The rest of Google's revenues come primarily from licensing web search technology. Google Checkout appears to be a loss leader for the time being, as merchants using it are not charged for sales up to ten times they amount they spend on AdWords each month. Starting in 2008, the company will begin charging 2 percent plus 20¢ per transaction in excess of the current AdWords spend multiple.

Google's cost of sales for 2006 was 8 percent. By way of comparison, Microsoft cost of sales stood at 22 percent for fiscal year 2006, Yahoo at 20 percent, and Apple at 13 percent. That shows that Google is extremely good at keeping sales-related costs down and that the company's business operations are humming along rather efficiently. R&D spending is up to $1.2 billion for 2006, over double 2005's $599.5 million figure.

At $11.2 billion, Google's cash on hand is comparable to Apple's $10.1 billion (from its Form 10-K for fiscal year 2006, which ended on September 30, 2006). It pales in comparison, however, to Microsoft's $34.1 billion (down from $60.5 billion in 2004). Yahoo, Google's chief competitor in search, has a relatively paltry $1.6 billion in the bank.



Data source: company 10-K forms; Yahoo Finance

If you've got a big war chest, one use for it is acquisitions, and Google has been very aggressive in that area. It is proving itself willing to spend large amounts on goodwill, which accounts for intangible assets like brand name, reputation, employee morale, and other factors that play into a company's performance. Google's acquisition of YouTube was valued at $1.19 billion (only $21.2 million of which was cash) and of that, $1.13 billion was goodwill and only $24 million was for patents and developed technology.

Having a war chest of $11.2 billion gives Google freedom to continue making strategic acquisitions, even overpaying if necessary. It also enables the company to take a longer-term view with its products and acquisitions, putting it in a position to push new services out the door now and figure out how to make money off them later. It's an enviable position to be in, but did anyone expect Google to build such a war chest from advertising?