Updated 3:23 p.m. PDT with additional information following Yahoo's conference call.
Yahoo earnings soared during its first quarter on the back of an advertising revival, cost cuts, and the realization of its search deal with Microsoft.
Revenue in the first quarter was $1.6 billion, up just 1 percent from the first quarter of last year. Excluding traffic acquisition costs, net revenue was $1.13 billion, or roughly flat with analyst expectations of $1.17 billion. Revenue from display advertising on Yahoo's site grew 20 percent compared to the prior year.
Net income was $310 million during the quarter, but that included several unexpected benefits, such as the sale of Zimbra and the beginning of reimbursement payments from Microsoft under the terms of the search deal finalized in February. Excluding those items, Yahoo's earnings per share during the quarter were still 15 cents, ahead of estimates of 11 cents.
"Large advertisers came back," said CEO Carol Bartz on an conference call following Yahoo's announcement. "That means their purse strings are starting to loosen up, and as the economy does better they are re-emerging to position their brands online."
Yahoo is putting more and more work into developing new ad units and trying to find more creative ways for advertisers to spend money with Yahoo, Bartz said. As a result, the market is shifting toward those buyers who are willing to pay extra for guaranteed placement on Yahoo's site, she said.
Revenue continued to decline on the search side of the operation, down 14 percent compared to the previous year. However, Bartz said that Yahoo believes that during the first quarter it stabilized the decline in its market share that dates back almost to the day its deal with Microsoft was announced.
The other plus for Yahoo was that operating income was up 87 percent, largely on the back of the cost-cutting efforts that CEO Carol Bartz put into place during the first quarter of 2009. Total operating expenses during the first quarter of 2010 were $76 million lower than a year ago.
Yahoo provided some clarity during the earnings call on how the Microsoft deal will affect its bottom line this year. The company saw a one-time benefit during the quarter of about $43 million related to transition costs, but will also see cost reimbursements from Microsoft for continuing to operate Yahoo's back-end search organization during the transition, said Tim Morse, Yahoo's chief financial officer. These operating cost reimbursements totaled just $35 million in the first quarter, but are expected to fall between $75 million and $85 million a quarter over the remainder of the year, he said.