• by Mark Walsh  @markfwal, April 19, 2011

Benefiting from revived brand advertising, Yahoo Tuesday reported first-quarter earnings of $223 million -- or 17 cents a share -- beating Wall Street analysts' earnings expectations by a penny. Net revenue of $1.06 billion was in line with expectations, but down 6% from the year-earlier period. Gross revenue of $1.21 billion was down 24% from a year ago.

Display ad spending on Yahoo's own sites increased 6% in the quarter, or 10%, excluding commissions paid to partners. But the company continued to show disappointing results in connection with its search technology alliance with Microsoft. Search ad revenue plummeted 46%, but that decline fell to 19% after factoring in partner payments.

During a conference call with analysts, Yahoo CEO Carol Bartz emphasized the company topping financial expectations in the quarter. "To put it simply, we delivered in Q1," she said, adding that Yahoo's turnaround was on schedule and expressing confidence that Yahoo was headed in the right direction.

Even so, she acknowledged that the company's search pact with Microsoft aimed at reducing its search-related costs in the long term is impacting overall revenue in the short term. Bartz pointed to operation hurdles tied to the transition to Microsoft powering search on Yahoo as part of their 10-year agreement. "[Microsoft's] AdCenter isn't yet producing the RPS (revenue per search) we had hoped for and we are confident is possible," she said.

Yahoo expects the technical problems to be worked out and to stabilize search revenue by the end of 2011. As of March, Yahoo's share of search queries was 15.7% -- down from 16.9% a year ago. Microsoft's Bing had 13.9% share, and Google had 65.7%. Google last week reported a 27% quarterly revenue gain and a 17% increase in profit, despite increased spending.

While the display ad increase of 6% represented a seasonal dip from the 14% gain in the fourth quarter, Yahoo Chief Financial Officer Tim Morse noted that after including certain accounting changes by display ad buyers and commissions, sales increased 17%. U.S. display advertising overall enjoyed a strong rebound in 2010, growing 24% to $9.9 billion, according to year-end data released last week by the Interactive Advertising Bureau.

Still, analysts remain concerned about Yahoo's ability to compete with the likes of Google and Facebook in keeping its users around. "We are concerned that Yahoo doesn't have assets in place to take advantage of what appear to be inflection point trends in social, mobile & local Internet, and video Advertising," wrote Citi analyst Mark Mahaney in a recent research note. "We are challenged to identify a near-term positive catalyst."

During the conference call, Yahoo highlighted engagement metrics showing that time spent and page views on its media properties had increased 17% and 8%, respectively, from a year ago. At the same time, however, time spent and page views on its communication and communities properties -- including Yahoo Mail -- had dropped 6% and 10%, respectively.

Looking to the second quarter, Yahoo projected revenue of $1.23 billion to $1.29 billion. Operating income will be in the range of $160 million to $190 million, and total expenses excluding payments to partners will be from $915 million to $935 million. Yahoo shares Tuesday closed up 3% to $16.62, but were edging down about 1% in after-hours trading.