SAN FRANCISCO -- Yahoo's Internet advertising revenue crumbled further during the first three months of the year and overshadowed a surge in the company's earnings.
The results released Tuesday seemed to dim some of the aura surrounding Yahoo CEO Marissa Mayer, who was lured away from a top job at Google Inc. nine months ago to engineer a turnaround at a company that has been struggling for years.
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There have been signs of encouragement since Mayer's arrival, most notably the first increase in Yahoo's annual revenue since 2008. Although the 2012 gain was just 2 percent, it raised hopes that growth would accelerate this year.
Instead, Yahoo's total revenue shrank by 7 percent in the latest quarter from the same time last year. The weak spot was in one of Yahoo's former strengths -- display advertising. After subtracting the commissions that Yahoo pays its partners, the company's display advertising revenue fell by 11 percent from last year to $402 million. That development suggests that Yahoo is losing more ground in a key area of Internet advertising to Google Inc., which already dominates search advertising, and Facebook Inc., whose online social network is becoming a more powerful marketing magnet.
On the plus side, Yahoo's first-quarter earnings surged 36 percent to top analyst estimates. But much of the higher profit flowed from investments such as Yahoo's 24 percent stake in Alibaba Group, a rapidly growing Internet company in China.
"They are making more money (as) an investment house," BGC Financial analyst Colin Gillis said.
Investors seemed more dismayed with the downturn in Yahoo's display advertising than the growth in earnings. Yahoo's stock sank $1.01, or nearly 4.3 percent, to $22.78 in extended trading. The shares had been up by more than 50 percent since Mayer's arrival.
In a conference call, Mayer reiterated her earlier statements that it may take several years before Yahoo's revenue is growing at a robust clip. For now, she said she is please that the business had become more stable under her leadership while making improvements to its services that will attract more visitors.
"Our long-term success will be defined by a series of sprints," Mayer told analysts. "We are reaching the end of the first sprint."
Yahoo Inc. earned $390 million, or 35 cents per share, in the first quarter, compared with $286 million, or 23 cents per share, at the same time last year.
If not for expenses covering employee stock compensation and certain other costs, Yahoo said it would have earned 38 cents per share. That was well above the average estimate of 25 cents per share among analysts surveyed by FactSet.
Revenue totaled $1.14 billion, down from $1.22 billion at the same time last year.
After subtracting ad commissions, Yahoo's revenue stood at $1.07 billion, about $30 million below analyst projections.
Analysts accepted Mayer's assessment that change will take time.
"You have to remember that turnarounds take a long time and we are still in the early innings of that," Gillis said.
Gartner analyst Andrew Frank noted that earnings were stronger than expected and "they didn't miss revenue by a lot." He called the results positive overall and said he didn't see any warning signs in there.
Mayer has been trying to make Yahoo's online services more engaging and easier to use in hopes that the improvements will encourage Web surfers to visit more frequently and stay for longer. That would help Yahoo sell more advertising to marketers who have been funneling more of their online budgets to Google and Facebook Inc. in recent years. Mayer also has been trying to recast Yahoo's services so they are better suited for the growing audience consuming content on smartphones and tablet computers.
As part of a makeover under Mayer, Yahoo has redesigned its home page, email service and Flickr photo-sharing service. The company, which is based in Sunnyvale, Calif., also has made a series of small acquisitions aimed primarily at attracting more engineers with expertise in mobile applications and social networking.
Those changes haven't been enough to generate a large enough increase in Yahoo's revenue to match the growth at the other major players in the Internet ad market. Google's ad revenues have been climbing by about 20 percent in recent quarters while Facebook's has been surging by about 40 percent. Google is scheduled to report its first-quarter results Thursday, while Facebook plans to post its numbers on May 1.
Yahoo also has been lagging the growth in the overall ad market, a trend expected to continue at least through the rest of this year. In Yahoo's main market, the U.S., the company's ad revenue this year is expected to increase by about 3 percent, according to the research firm eMarketer. That contrasts with an anticipated 25 percent gain in overall spending on digital ads in the U.S. this year, eMarketer said.
AP Technology Writer Barbara Ortutay in New York contributed to this story.