Google provided a bright spot for investors by posting positive fourth-quarter earnings as its web search advertising business remained strong despite the bleak economy.

The internet search giant said its search query growth was strong and reported that revenue, including commissions paid to affiliated advertising sites, totalled $5.7 billion, up 18 per cent year on year and up 3 per cent from the previous quarter.

Net income for the fourth quarter fell to $382 million, or $1.21 a diluted share, from $1.21 billion, or $3.79 a share, a year after the downturn forced Google to write down $1.1 billion of the combined $1.5 billion that it has invested in two troubled companies, AOL and Clearwire. Excluding these one-time charges, profit rose to $5.10 a share, compared with Wall Street's target of $4.95, according to Reuters Estimates.

"At least we have something to feel good about with this Google news in what has been shaping up to be a gloomy earnings period," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management.

While the economic climate had cut back Google's profits compared to previous years, the generally upbeat results contrasted with a missed forecast and 5,000 layoffs announced earlier in the day by rival Microsoft.

Google is to allow its 20,222 employees to swap their outstanding stock options for new ones that will carry a lower exercise price — which means the workers will have a better chance of making money from the options.

The move, aimed at motivating and retaining staff, was driven by 47 per cent drop in Google's stock price over the past year, leaving 85 per cent of employees holding options that are "under water" and could not be cashed in now at a profit. The new options will be priced at Google's stock price at closing on March2. The company calculated this would cost $460 million.

Eric Schmidt praised the company's strength in uncertain economic times, but acknowledged that the months ahead were "uncharted territory".

"We don't know how long this period will last. We obviously hope it will be short. We're certainly prepared to get through this," he told analysts in a conference call.

After subtracting commissions paid to its ad partners, Google's revenue stood at $4.22 billion - about $100 million above analyst estimates. Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of its AdSense partners, increased 18 per cent over the fourth quarter of 2007 and 10 per cent over the third quarter of 2008. This showed that despite the consumer slowdown, people were still clicking online to look at online ads served by Google. Mr Schmidt said that comparison shopping by consumers had helped drive up the click rate.

Google shares gained $6.68, or 2 per cent, in extended trading after finishing the regular session at $306.50.

The company said that revenues from outside of the United States totaled $2.86 billion, representing 50% of total revenues in the fourth quarter of 2008. Revenues from the UK totaled $685 million but were hit by the fall in the value of the pound.

Mr Schmidt said the company had been able to bear down on costs. The company has closed several unpopular and unprofitable services product recently to concentrate on its core business. Google recently also sacked about 100 recruiters - the first job cuts in the company's history. Google said it had ended the quarter with only 99 more employees than the previous quarter.

Mr Schmidt said: "It's unclear how long the global downturn will last, but our focus remains on the long term, and we'll continue to invest in Google's core search and ads business as well as in strategic growth areas such as display, mobile, and enterprise."

Google will look to its Android mobile platform to drive future growth and is gearing up to provide more services to businesses through internet-based "cloud" computing.

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