"This is a necessary next step in our transformation," Yahoo Chief Executive Jerry Yang said during the conference call. Analysts had estimated layoffs ranging from 700 to 2,500 in the days leading up to the earnings call.

Yahoo reported a fourth-quarter profit of $205.7 million, or 15 cents a share--down from $268.7 million, or 19 cents a share, a year ago. Revenue rose 14% to $1.4 billion, excluding traffic acquisition costs (payments to advertising partners), slightly below analysts' estimates of $1.41 billion.

Still, Yahoo beat analysts' projected earnings of 11 cents per share.

Yahoo has been under intense pressure from Wall Street to shake up its business in the face of a losing battle with Google over search and increasing competition from social networking sites such as Facebook and MySpace. After replacing Terry Semel as CEO last summer, co-founder Jerry Yang outlined a three-prong strategy in October to make Yahoo the start page for most Internet users, a "must buy" for advertisers, and creating industry-leading platforms.

Sounding an upbeat note, Yang said Tuesday that Yahoo was making good progress on those goals. "Our efforts to build a large-scale, premiere display advertising network and improve search monetization are beginning to pay off," he said. In particular, he pointed to 20% year-over-year growth in its display advertising during the quarter and a 30% increase in search revenue. The latter follows the rollout of its new Panama search platform during 2007.

Regardless, Yahoo continues to lose ground to Google. Yahoo's share of search spending dropped by 25% during the fourth quarter from the year-earlier period, falling from 24.1% to 17.9% of total search dollars, according to data released Tuesday by search engine marketing firm Efficient Frontier.

Google, meanwhile, increased its stranglehold on search, going from a 70.5% to a 76.6% share. The company captured nearly all of the search spending growth in the fourth quarter of 2007, compared to the year-earlier quarter. Some analysts have suggested that Yahoo give up on competing with Google on search altogether, outsourcing that function to its key rival instead.

Yahoo on Tuesday also announced an expanded partnership with AT&T spanning broadband Internet access and mobile phones. Under the deal, Yahoo would power a new AT&T Web portal and provide search and display for AT&T subscribers on mobile devices and PCs.

Yahoo began restructuring its carrier agreements last year from fee-based deals to revenue-sharing arrangements. While Yang said the new agreements would drive long-term growth, the switch to ad-sharing deals is expected to cost Yahoo $150 million to $200 million in 2008.

Assuming oversight of the company's engineering challenges will be Aristotle Balogh, named Tuesday as Yahoo's new chief technology officer. Balogh, formerly CTO for Verisign, will manage all of the company's technology operations and report directly to Yang.

Looking ahead to 2008, the Yahoo CEO acknowledged that while the company "continues to face headwinds this year," he believes the company will return to double-digit cash flow growth by 2009. Yahoo had an increase in free cash flow of 6% from 2006 to 2007.

Yahoo expects revenue this year to be $5.35 billion to $5.95 billion, with growth estimated in the mid-teens. Operating cash flow is projected at $1.72 billion to about $2 billion.

Yang and other Yahoo executives declined to predict how the broader economy and recession fears might impact the company's business in 2008. "We're not in the business of prognosticating the economy," said Yang. "What we are seeing so far is an online ad market that continues to grow."

However, Yahoo President Sue Decker allowed that the company had seen "pockets of weakness" during the fourth quarter in advertising categories such as financial services, travel and retail. Analysts have speculated that Yahoo could be hit disproportionately hard by a downturn in such sectors because of its heavy reliance on display advertising. But Decker said the company was encouraged by revenue growth in other areas such as search to help offset any potential slowdown in display advertising.

The company also said that better integrating display and search advertising on Yahoo was a key priority for 2008.

Both Yang and Decker reiterated ongoing efforts to bolster key start pages within Yahoo and scrap non-performing properties such as Yahoo 360, Brand Universes, Yahoo Photos, and Yahoo Direct.

By contrast, the properties it is concentrating most heavily on improving are the home page, search, MyYahoo, Yahoo Mail, and mobile. These properties in turn help drive traffic to its news, finance and sports start pages. The company's goal is to increase traffic to its key pages by 15% each year.

Decker said Yahoo's page views continued to grow at double-digit rates in the fourth quarter. She also noted that the company plans to use visits rather than page views or unique users as its "most critical" metric.

Yahoo's stock closed Tuesday at $20.81, down almost 40% from its 52-week high of $34.08. In after hours trading, the stock had fallen another 10% to $18.72.

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