Google earnings drop 68% in fourth quarter

Company also writes down value of AOL

Google on Thursday posted its first declining quarter as a public company, then delivered a blow to Time Warner by writing down the value of AOL, in which Google owns a 5% stake.

Google invested $1 billion in Time Warner's AOL asset in 2005 but said Thursday it has written that down by $726 million, suggesting the value of AOL has fallen from $20 billion in 2005 to about $5.5 billion.

While Google reported fourth-quarter earnings that fell 68% to $382 million, investors cheered the results by bidding the stock as much as 2% higher in after-hours trading. The stock was up 1% during the regular session to $306.50.

Revenue rose 18% to $5.7 billion, half of which came from outside the U.S., up from 48% a year ago.

While its "absolutely true" that advertising is still moving to the Internet, Google CEO Eric Schmidt said, the worldwide economy has taken a toll on Google's business.

"We're certainly prepared to get through this. No problem," Schmidt said during a conference call.

Google execs also boasted that they are working on ways for Google's search technology to recognize the meaning of phrases as opposed to just words, and they said that some new video ad formats have gained "some traction."

Recognizing that Google's share price has taken a hit along with the rest of the market, Schmidt also said the company will allow employees to exchange existing stock options -- many of which are underwater -- for new options with a strike price equal to Google's closing share price come March 2. The tradeoff is that such exchanges will add 12 months to the original vesting dates.

Google stressed that Schmidt, as well as co-founders Sergey Brin and Larry Page, do not hold options.

Google shares have fallen about 50% in eight months.