Yahoo Inc beat Wall Street's profit and sales expectations as spending by advertisers showed signs of life in the third quarter and as months of cost-cutting and restructuring boosted the Internet company's bottom line.

Shares of Yahoo, the top U.S. seller of online display ads but a distant No. 2 to Google Inc in search, jumped 5 percent after the results, which analysts said boded well for the fourth quarter, when ad spending should improve further.

Yahoo's revenue from display advertising was much better than expected, said RBC Capital Markets analyst Ross Sandler, citing the 2 percent sequential increase in U.S. display ad sales.

That basically says that large Fortune 500 advertisers who want high-quality, premium inventory are going back to Yahoo more in the third quarter than they were in the first or second, he said.

Yahoo's net profit more than tripled year-over-year, though a big chunk of the upside came from the sale of its stake in Chinese Web site alibaba.com.

Yahoo has undergone significant restructuring since Chief Executive Carol Bartz took over in January. It said in April it would lay off 5 percent of its workforce, or about 675 jobs, and it also pulled the plug on underperforming properties.

Yahoo also signed a 10-year Web search partnership with Microsoft Corp to challenge Google, a pact that U.S. and European antitrust regulators are evaluating.

Chief Financial Officer Tim Morse said on a conference call that the company still believes the deal will close in early 2010, and that they can make significant progress on integration in one or two major markets next year.

Morse, who began as Yahoo CFO in July and handled Tuesday's earnings conference call on his own due to Bartz' having come down with something -- which he characterized as not serious -- said large advertisers began to spend again in the third quarter.

I'm not going to predict when the growth rebounds, but I feel good that things are no longer on the downward trend.

Excluding traffic acquisition costs that Yahoo shares with partners, net revenue was $1.13 billion in the third quarter, close to the average analyst forecast of $1.12 billion. That compared with net revenue of $1.14 billion in the June quarter and $1.33 billion in the year-earlier period.

RISING TIDE LIFTS ALL YAHOO BOATS?

Some analysts said the improvement that Yahoo experienced was a reflection of a brightening overall economic climate as much as anything else.

Most of the benefit that they are seeing is because the economy is improving -- a rising tide -- not because of all the changes they've made, said JMP Securities analyst Sameet Sinha.

Net income was $187.8 million, or 13 cents a share, in the third quarter, up from $54.3 million, or 4 cents per share, in the year-earlier quarter. Analysts were looking for 7 cents per share, according to Thomson Reuters I/B/E/S.

Yahoo said the sale of part of its stake in Chinese e-commerce company Alibaba.com <1688.HK> contributed 4 cents per share to earnings.

Yahoo said its operating cash flow was $384 million in the third quarter, ahead of its forecast range of $330 million to $370 million.

Yahoo said it spent less than it expected on new initiatives, including a recently launched global marketing campaign, while efforts to cull undesirable advertisers had a smaller negative impact on revenue than expected.

From a headline perspective the number is clearly a beat, but once you start digging into the numbers, some of the underspending and delays in ad quality initiatives were some of the primary reasons for the bottom line upside, said Kaufman Brothers analyst Aaron Kessler.

Yahoo said gross revenue in the fourth quarter would range from $1.6 billion to $1.7 billion, with traffic acquisition costs ranging between 26 percent and 27 percent of revenue. That meant net revenue would be between $1.17 billion and $1.26 billion, against the average Street forecast of $1.22 billion.

Shares of Yahoo, the second most popular Internet destination in the United States, rose 87 cents to $18.04 in after-hours trade on Tuesday

Yahoo's Morse would not comment on reports that Yahoo is shopping around certain businesses that are no longer central to the company's focus, but noted that the company continues to look at its portfolio of assets.

During prepared remarks in the conference call, he stressed that the company had no plans to liquidate, spin off or otherwise dispose of its remaining stake in Alibaba.com and in Yahoo Japan, which he said had a pretax value of $10.3 billion.

(Reporting by Alexei Oreskovic, writing by Tiffany Wu; Editing by Richard Chang, Leslie Gevirtz, Gary Hill)

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