April 21 (Bloomberg) -- Yahoo! Inc., owner of the second- most popular U.S. search engine, reported profit and sales that met analysts’ estimates. The company will cut almost 700 jobs, or 5 percent of its workforce, after online-ad sales dropped.

First-quarter profit fell 78 percent to $118.7 million, or 8 cents a share, Yahoo said today in a statement. Excluding fees passed on to partner sites, sales were $1.16 billion. Analysts had estimated profit of 8 cents and revenue of $1.2 billion, according to a Bloomberg survey.

Carol Bartz, who took over as chief executive officer in January, is reorganizing Yahoo to cope with the recession and competition from Google Inc. Advertising sales on Yahoo’s sites fell about 10 percent in the quarter from a year earlier. Yahoo, which is in negotiations with Microsoft Corp. for a Web-search partnership, needs to discontinue or outsource more products, Bartz said today on a conference call.

“You’ve had more or less an advertising depression -- what’s encouraging right now is you can see where the bottom is,” Larry Haverty, a portfolio manager with Gamco Investors Inc. in Rye, New York, said in a Bloomberg Television interview. “The company is running very fast in a troubled environment -- they are just not running as fast as Google.”

Yahoo, based in Sunnyvale, California, rose 74 cents, or 5.1 percent, to $15.12 in extended trading after closing at $14.38 on the Nasdaq Stock Market. The shares have gained 18 percent this year.

Second Quarter

The job cuts will affect workers worldwide and employees will be notified in the next two weeks, Yahoo said. The company, which had about 13,500 employees at the end of the first quarter, said it is also continuing to cut other costs.

“Our process is to continuously try to drive our costs down,” Yahoo Chief Financial Officer Blake Jorgensen said in an interview. “This is really to try to build in flexibility for future investment.”

For the second quarter, Yahoo forecast overall sales of $1.43 billion to $1.63 billion. That compares with the $1.64 billion estimate of Christa Quarles, an analyst with Thomas Weisel Partners LLC in San Francisco.

Yahoo said today that Bartz, 60, has also assumed the title of president. Last year, profit was $536.8 million, or 37 cents a share. Those results were bolstered by a $401 million gain from Yahoo’s stake in China’s Alibaba.com Ltd.

Revenue from ads next to Web-search results declined 3 percent in the quarter, while sales of so-called display ads dropped 13 percent, Yahoo said.

‘Little Disconcerting’

“On the revenue side, I was a little disappointed,” said Sameet Sinha, an analyst with JMP Securities LLC in San Francisco, pointing to the decline in search-ad sales. “This was the one business that they had going for them. That is definitely a little disconcerting.”

U.S. online-ad spending growth will slow to 4.5 percent this year, down from 10 percent last year, according to New York-based research firm EMarketer Inc. Last week, Google reported its first sequential drop in quarterly sales since it went public in 2004.

Bartz arrived at Yahoo after former CEO and co-founder Jerry Yang spurned a buyout offer from Microsoft of as much as $47.5 billion. Bartz has said she’s open to a potential search partnership with Microsoft and that she would negotiate in private.

Bartz said during the call that the search business is valuable to Yahoo, declining to comment further.

Microsoft CEO Steve Ballmer said last month that the two companies need to work together to challenge Google. Yahoo handled 21 percent of U.S. search queries in March, while Microsoft had 8 percent, according to ComScore Inc. of Reston, Virginia. Google had 64 percent.

Shutting Businesses

Yahoo has shut some underperforming businesses, including travel search site FareChase and an online storage service called Briefcase.

“Yahoo is a strong company and we will continue to invest with the goal of becoming an even stronger in the future.” Bartz said today on the call.

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

Last Updated: April 21, 2009 17:43 EDT