• by Mark Walsh  @markfwal, July 21, 2009

Yahoo's cost-cutting efforts appeared to pay off as the Web portal posted its first quarterly earnings gain since the first three months of 2008.

The Web portal reported that second-quarter profit increased 8% to $141 million, or 10 cents a share, beating analyst expectations of 8 cents per share.

Gross revenue, however, continued to slide for the third consecutive quarter, falling 13% to $1.57 billion. Net revenue came in at $1.14 billion, in line with Wall Street's modest expectations. With both search and display advertising dollars continuing to decline in the quarter, the results suggest the online ad slump has yet to bottom out.

"Considering the economy, I'm pleased with our results," said Yahoo CEO Carol Bartz, during an analysts conference call Tuesday. Company executives were not ready to predict a recovery, citing continuing "mixed signals" in the Internet ad marketplace.

Looking ahead, Yahoo projected revenue for the third quarter in the range of $1.45 billion to $1.55 billion.

After cost-reduction moves, including the layoff of 5% of the company's workforce last quarter, however, Bartz said Yahoo will begin investing again in new branding efforts and sales force hiring. Among other initiatives, the company also plans to cut the frequency of some ads to improve the user experience.

In its key display ad business, revenue dropped 14% from the year-earlier period to $393 million, but increased in actual dollars from the $371 million in the first quarter. Timothy Morse, Yahoo's new chief financial officer, indicated that brand advertising on the portal had seen a single-digit quarterly uptick driven by strong demand from large advertisers. "It's a positive sign, but we remain cautious overall," he said.

Categories including finance, travel and entertainment saw the biggest ad declines overall, but automotive showed signs of stabilizing, according to Morse.

On the search side, it was harder to put a positive spin on the numbers. Search revenue fell 15% to $359 million after a 3% gain last quarter to $399. While search query volume was up 9%, a decline in revenue per search led to a drop-off in sales.

Bartz brushed off the reversal as a temporary stumble. "I don't think that's a stake in the ground -- any particularly meaningful trend," she said. "Advertisers are choosing fewer keywords and optimizing the ones they buy. "What we really need to provide to our ad partners is an engaged audience."

Search rival Google wasn't immune to recessionary trends either, as its sales slowed to just 3% in the second quarter.

Bartz was not asked about -- and didn't comment on -- recent reports that Yahoo is finally closing in on a search partnership with Microsoft after months of rumored discussions between the companies. But she was asked about Bing, Microsoft's new search engine -- which has garnered plaudits and even helped Microsoft gain a slight market share from Google and Yahoo in June, according to research firm NetApplications. "I think Bing's actually a good product," Bartz said. "But hard to say whether its share gains are curiosity or a trend." She added that a month after the search engine's debut was too soon to judge its impact.

The Yahoo CEO was more focused on discussing Yahoo's own initiative, including its new home page launched Tuesday, and its plans to earmark $75 million for hiring new sales staff and kicking off a new branding campaign in the third quarter. The reinvestment efforts follow a period of restructuring and retrenchment that began before Bartz's arrival in January.

Yahoo last month announced the hiring of former Young & Rubicam executive Penny Baldwin to lead its rebranding efforts along with outside help from brand consulting firm Landor Associates.

To keep from annoying users and improve ad performance, Bartz also said Yahoo would decrease the frequency of some display ads on the site. "It's no secret that many of our users are put off by a few irritating and high-frequency ads that detract from their time with us," she said, without specifying exactly which ads bug people.

Yahoo also announced an expanded partnership with AT&T Tuesday, under which the telecom giant's ad sales force of more than 5,000 will sell Yahoo display inventory to local businesses across the country.

Bartz said the move reflects Yahoo's goal to increase its presence in the local online ad market. In that vein, she also mentioned that Bank of America is using Yahoo Answers and Yahoo Groups to promote a campaign aimed at small businesses.

Yahoo shares closed Tuesday at $16.75 and were trading down about 3% in after-hours trading.