Shares of Yahoo gained 7.7 per cent to $13 in extended trade on the results, after closing 6.1 per cent lower at $12.07 on Nasdaq. But despite the rebound, the stock remains at 5-year lows as hopes earlier this year that Microsoft might acquire Yahoo for $33 or more per share have dissipated for now.

Free cash flow fell to $215 million from $231 million in the 2008 second quarter and $310 million in the year-earlier quarter.

Analysts said that while the latest downturn in Yahoo's business has forced the Sunnyvale, California-based company to make sweeping cutbacks, these cuts are likely to further damage its competitiveness with Internet market leader Google.

"They don't have much of a choice, but it's likely to hurt Yahoo's longer-term growth," Friedland said.

Excluding one-time items such as the costs of fending off a proxy campaign by Carl Icahn to force Yahoo back into talks with Microsoft Corp on a possible merger, quarterly profit rose to $123 million, or 9 cents a diluted share.

For the September quarter, the company said it ran up $36 million in merger, consulting and legal costs related to its on-again, off-again talks with Microsoft, an aborted proxy fight with activist investor Carl Icahn, and its bid to win regulatory approval for an ad sales deal with Google Inc.

Icahn subsequently joined the Yahoo board.

Yahoo and Google recently agreed to delay their advertising deal amid competitive concerns by the US Justice Department but Yang.