But Yahoo's unchanged outlook on revenue for 2008 may not provide enough leverage to help the company fend off an unsolicited takeover attempt by Microsoft or push up its offer price.
In a conference call following the earnings announcement, Yang reiterated Yahoo's rejection of Microsoft's $31-a-share bid as substantially undervaluing the company's "one-of-a-kind global brand."
But he added that Yahoo remains open to a potential deal with Microsoft while "expeditiously pursuing" other alternatives.
For the quarter, Yahoo reported earnings of 11 cents per share on revenue of $1.35 billion (excluding traffic acquisition costs) that were at the high end of the company's forecast range.
Wall Street had expected profit of 9 cents a share on revenue of $1.32 billion, according to a survey of analysts by Thomson Financial.
Yahoo's EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of $433 million in the quarter was also above the estimated midpoint of $425 million.
The company got a lift during the quarter from a non-cash gain of $401 million through the initial public offering of China-based Alibaba.com, which Yahoo holds a 40% stake in. Overall, Yahoo said its international revenue dropped by 11%, while U.S. revenue jumped 19%.
Yahoo executives remained tight-lipped about the latest developments surrounding the company's epic takeover stand-off with Microsoft. Regarding a recent test to outsource paid search ads to Google, President Sue Decker said it was too early to say whether the effort would lead to a wider partnership with Google.
"It's premature to speculate on what options we may ultimately pursue or whether some form of arrangement might result," said Decker, referring to the search ad trial the companies announced two weeks ago.
She stressed that Yahoo still plans to be a significant player in search, noting that the company surpassed its three-year goal of 10% volume growth in U.S. search during the quarter and came close to that goal internationally.
Decker also cited upgrades to parts of its Panama search platform aimed at improving the relevancy of ads by lowering bid requirements for advertisers with higher click-through rates.
Furthermore, revenue per search (RPS) was up 15% globally. Even so, Decker acknowledged that Yahoo has a ways to go catch up with Google in search monetization. When it launched Panama, the company estimated that it had about a 100% RPS gap with Google. That gap has been narrowed by 30 percentage points, leaving about 70% still to close.
On the display side, Yahoo reported that revenue on its own sites increased 16% compared to the year-earlier period, and that inventory had exceeded its goal of 12% growth in the quarter.
Chief Financial Officer Blake Jorgensen said Yahoo has continued to see softness in both display and search in financial services, travel and retail advertising sales as a result of the broader economic downturn.
The areas in which the company continued to see "double-digit" growth included automotive, telecom, pharmaceutical and consumer packaged goods advertising. Among the stronger categories, however, telecom and technology were only strong in display.
"The underlying marketing services business continues to grow at very healthy rates," he said.
Decker also noted that CPMs on remnant inventory sold through its Right Media Exchange had nearly doubled and that premium inventory prices were up modestly.
Looking ahead, Jorgensen affirmed Yahoo's full-year 2008 revenue estimate of $7.2 billion to $8 billion, but raised guidance on free cash flow from a range of $850 million to $1 billion to $900 million to $1.050 billion.
The estimate on operating cash flow was also increased from $1.725 billion to $1.97 billion to $1.77 billion and $2.025 billion.
Some analysts had suggested that a significant boost in Yahoo's full-year guidance could give the company a stronger hand in negotiating a higher bid from Microsoft. But its modest 2008 outlook isn't likely to place additional pressure on the software giant to sweeten its bid.
For his part, Microsoft CEO Steven Ballmer reiterated that the company was sticking with its $31-per-share bid.
"We think we can accelerate our strategy by buying Yahoo, and will pay what makes sense for our shareholders," Ballmer said Tuesday in a Reuters report while on business in Morocco. "I wish Yahoo all the success with its results, but it doesn't affect the value of Yahoo to Microsoft."
Microsoft has threatened to lower its bid and launch a proxy fight by Saturday if Yahoo doesn't begin merger talks. In a preview report issued Monday, Piper Jaffray analyst Gene Munster predicted that if Yahoo's quarterly earnings met expectations, a proxy contest would be the most likely step in the unfolding corporate drama.
In after-hours trading, Yahoo's shares were trading down 0.53% at $28.39.