• by Mark Walsh  @markfwal, October 20, 2009

Thanks to aggressive cost-cutting efforts, Yahoo's third-quarter earnings more than tripled, even as the Internet giant's revenue fell for the third straight quarter amid the continuing ad slump.

In a conference call with analysts Tuesday, however, the company indicated that the ad market was showing signs of life, with spending on premium display advertising increasing over the prior quarter.

Yahoo posted a profit of $186 million -- or 13 cents a share -- easily beating Wall Street estimates of 7 cents a share, according to a survey by First Call. But five cents of that profit came from the sale of Yahoo's stake in China-based Alibaba.

In the year-earlier period, Yahoo earned 4 cents a share on net revenue of $1.33 billion.

Overall revenue dropped to $1.58 billion, down from 12%, and revenue excluding traffic-acquisition costs dropped 15% to $1.13 billion. Both figures were slightly better than analyst expectations.

"With revenue coming in above our guidance and flat sequentially, we had a solid third quarter that signals our major businesses have stabilized," Yahoo CEO Carol Bartz said in a statement. Because of an illness, Bartz was not able to participate in the conference call.

In her absence, the company's recently hired Chief Financial Officer Tim Morse echoed the theme that the ad market was stabilizing and even starting to look up. "Ad spending is starting to free up, and we're a great value proposition for brand advertisers," he said.

In terms of a rebound, he pointed in particular to a single-digit uptick in brand advertising on Yahoo compared to the prior quarter, even as "non-guaranteed" ad sales declined sequentially due to ad quality improvements reducing unsold inventory. Display advertising revenue overall on the site fell 8% from a year ago to $399 million, but increased 2% from the second quarter.

On the search side, sales dropped 19% from a year earlier to $354 million, and about 1% from the prior quarter. Morse said search query volume was up a bit, but revenue-per-search fell slightly. Google reported a strong third quarter last week, raising hopes that Yahoo might have a better showing itself in search.

In regard to Yahoo's 10-year search partnership with Microsoft pending regulatory review, Morse reiterated that the company expects the deal to close by early 2010. The alliance got the thumbs up from Madison Avenue this week when the American Association of Advertising Agencies threw their support behind the arrangement in a letter to the Department of Justice. Yahoo and Microsoft together would account for almost 30% of the U.S. search market, compared to Google's 65% share.

To help reverse its financial woes, Yahoo has taken significant cost-saving steps under Bartz, including the layoffs of 675 employees this year (after 1,400 were cut late last year) and the shuttering of weaker properties including GeoCities and Yahoo 360. This week, Yahoo announced it would shut down its Search Summit paid inclusion program by year's end. The cutbacks were reflected in total operating expenses in the third quarter falling 18% from a year ago to $775 million.

One area where the company has increased spending lately is on advertising itself. Yahoo last month kicked off a $100 million marketing campaign aimed at revitalizing its brand and touting the increased personalization of the site following the relaunch of its home page. The company spent $18 million on branding in the quarter.

Morse said Yahoo's cross-media "It's You" campaign has gotten positive feedback so far, but he explained that the effort is not just directed at consumers. "We're using this not just as an external catalyst but an internal catalyst too, identifying who we are and where we want to go," he said, adding that advertising will be an ongoing part of Yahoo's expenses.

Ad Age reported Tuesday that Yahoo was bringing on Omnicom Group's Goodby Silverstein & Partners to add extra creative talent for its U.S. ad campaigns. WPP's Ogilvy & Mather, which helped create the current campaign, would focus on global ad efforts with Goodby's arrival.

With a more upbeat outlook for the fourth quarter, Yahoo expects revenue of $1.6 billion to $1.7 billion, with operating cash flow of $300 million to $400 million. Morse said he expected stronger results in both display and search advertising in the current quarter. "We saw better yields this quarter -- the economy starting to loosen up a bit, and brand spending coming back," he said.

Online ad spending dropped 5.3% during the first half of 2009 to $10.9 billion, according to figures from the Interactive Advertising Bureau and PricewaterhouseCoopers. On Monday, eMarketer released a revised online ad forecast, predicting that spending will fall 2.9% this year to $22.8 billion.