Yahoo is making more money under chief executive Marissa Mayer, despite the Internet company struggling to sell more of the ads that bring in most of its revenue.
The latest signs of earnings progress came last night with the release of Yahoo's first-quarter earnings report.
But the numbers also show further signs of decay in Yahoo's sales of display ads. On the plus side, Yahoo's ad revenue tied to search results rose.
Investors seemed more worried about the downturn in Yahoo's display advertising than the surge in the company's earnings and its shares sank over 3% after the results came out.
The negative reaction suggests that some investors may be losing their faith in Mayer, a respected executive who defected from Google to join Yahoo nine months ago. Investors have been counting on Mayer to duplicate some of the success she enjoyed while helping to build Google into the Internet's most powerful company.
She was one of Google's first employees and a top executive there for 13 years. Yahoo's stock had been up by more than 50% since Mayer's arrival at Yahoo, thanks largely to the rising value of Yahoo's 24% stake in Chinese Internet company Alibaba Group.
Yahoo said it earned $390m, or 35 cents per share, during the first three months of the year. That is a 36% increase from income of $286m, or 23 cents per share, the same time last year. If not for expenses covering employee stock compensation and certain other costs, Yahoo said it would have earned 38 cents per share. That was well above the average estimate of 25 cents per share among analysts.
But in an unpleasant surprise, revenue fell 7% from last year to $1.1 billion. After subtracting ad commissions, Yahoo's revenue stood at $1.07 billion, about $30m below analyst projections.
The weak spot came in display advertising, which used to be Yahoo's strength. Excluding ad commissions, Yahoo's first-quarter display advertising revenue fell 11% from last year to $402m.
Mayer has been trying to make Yahoo's online services more engaging and easier to use in hopes that the improvements will encourage Web surfers to visit more frequently and stay for longer. That would help Yahoo sell more advertising to marketers who have been funneling more of their online budgets to Google and Facebook in recent years.
She also has been trying to recast Yahoo's services so they are better suited for the growing audience consuming content on smartphones and tablet computers.
In a statement, Mayer said Yahoo "saw continued stability in our business, strengthened our team, and started the year with fast execution against our products and partnerships. We are moving quickly to roll out beautifully designed, more intuitive experiences for our users. I'm confident that the improvements we're making to our products will set up the company for long-term growth."
As part of a makeover under Mayer, Yahoo has redesigned its home page, email service and Flickr photo-sharing service. The company, which is based in Sunnyvale, California, also has made a series of small acquisitions aimed primarily at attracting more engineers with expertise in mobile applications and social networking.
But those changes have not been enough to generate a large enough increase in Yahoo's revenue to match the growth at the other major players in the Internet ad market. Google's ad revenues have been climbing by about 20% in recent quarters while Facebook's has been surging by about 40%.
Google is scheduled to report its first-quarter results on Thursday while Facebook plans to post its numbers on May 1.