Investors cheered Yahoo's plans to keep a larger than expected stake in Chinese e-commerce giant Alibaba Group Holding, overlooking continuing softness in its core online advertising business.
Yahoo said last night that it would sell fewer shares than originally agreed from its 24% stake when Alibaba goes public.
That means Yahoo will reap more gains if Alibaba's stock surges after the IPO, analysts said.
Yahoo's core business of selling online display and search advertising remained soft in the third quarter under fierce competition from Facebook and Google.
Prices for Yahoo's display ads declined 7% year-over-year, while the number of display ads sold increased by roughly 1%.
Revenue from search advertising, which accounts for 39% of the total, was up 3% year-over-year, excluding certain costs.
Yahoo's chief executive Marissa Mayer pointed to improvements in user traffic to the company's various web destinations and said the increasing usage would start to show up in Yahoo's revenue growth in the coming year.
She said that users of Yahoo's mobile products increased 15% from the previous quarter to 390 million, while traffic to a revamped version of Yahoo's sports website had doubled.
"We are in this to win and to win big," Mayer said during a post-earnings video conference that was streamed live on the company's website. She said new "native" ad formats that Yahoo had begun experimenting with had encouraging results that could help Yahoo boost revenue on its mobile products, which she described as "under-monetised."
Yahoo said it earned $297m in net income in the third quarter, or 28 cents a share, compared to $3.16 billion or $2.64 a share in the third quarter of 2012, when Yahoo's results included a $2.8 billion gain from the sale of a portion of its stake in Alibaba Group.
Excluding certain items, Yahoo said it earned 34 cents per share, a cent above the average analyst estimate.
Yahoo's stock price has more than doubled since Mayer took the reins in July 2012. But analysts say much of the gain is due to aggressive stock buybacks and Alibaba's expected IPO.
Yahoo included Alibaba's second-quarter financial results in its quarterly earnings report last night. Alibaba's revenue grew by 61% to $1.74 billion in the three months from April to June, while net income leapt 159% to $707m.
That pace of revenue growth is down from 71% in the first quarter, but still exceeded forecast for about 54%.
Yahoo took down its own forecast for the full 2013 year, trimming the midpoint of its net revenue guidance from $4.5 billion to $4.425 billion. The company also said its adjusted operating income would be lower than it previously projected.
Mayer, a former Google executive, has focused on revamping Yahoo's Web products since joining the company in July 2012. But while Mayer has brought back some buzz to the Yahoo brand, analysts say the company's business remains challenged by an industry-wide shift to automated online advertising exchanges.
These exchanges, which allow marketers to buy ads across a wide variety of websites, have pushed down the price of the premium display ads that Yahoo sells.