JOIN USThe mixed progress report comes as expectations for the Web portal remain low two years into Chief Executive Carol Bartz' effort to revive growth at the company.
"Clearly there is some improvement in the business here, both from a topline perspective and a margin perspective," said Pacific Crest Securities analyst Steve Weinstein.
"The growth in their display business, when you peel everything back, continues to look good," he said.
But analysts said Yahoo's search business, which experienced a 19 percent year-on-year decline in net revenue in the first quarter, is a cause for concern.
Yahoo executives said on Tuesday that the company would delay plans to use Microsoft's search advertising system in certain markets as it waits for Microsoft to improve the technology.
In its current state, Yahoo executives said, the Microsoft search technology was not delivering the expected lift to Yahoo's search ad revenue.
Revenue per search won't rise to levels Yahoo experienced pre-Microsoft until the end of the year, compared with a previous forecast of mid-year, Bartz said on a conference call on Tuesday.
Bartz said she was confident that Microsoft had a clear plan to address the issues. And she noted that under the 10-year deal that Yahoo struck with Microsoft in 2009, Yahoo gets reimbursed by Microsoft through the end of next March for any decline in revenue per search.
Microsoft was not immediately available for comment.
Shares of Yahoo were up roughly 3.5 percent at $16.68 in after-hours trading on Tuesday.
Looking forward, Yahoo projected net revenue between $1.08 billion and $1.13 billion in the second quarter. Analysts were looking for $1.1 billion
Yahoo is one of the most popular destinations on the Web and the No. 1 provider of online display ads in the United States, but the company is facing increasing competition from social networking service Facebook and continuing pressure from search leader Google Inc.
Yahoo said it earned $223 million in net income, or 17 cents a share, in the three months ended March 31 compared with $310 million, or 22 cents a share, in the year-ago period.
Excluding charges related to investments in Japan, Yahoo earned 19 cents per share, comfortably topping the 16 cent average of analysts polled by Thomson Reuters I/B/E/S.
Yahoo executives said the company was continuing to make progress on efforts to expand into the fast-growing mobile Internet market, and to increase the amount of video advertising on the site.
Net revenue, which excludes fees paid to partner websites, was roughly $1.064 billion in the first quarter, squeaking past the $1.055 billion average of analyst expectations but falling 6 percent from $1.13 billion a year earlier.
"Our turnaround is proceeding on schedule, and we are very confident Yahoo is heading in the right direction," Bartz told analysts on the call.