updated 10/17/2006 6:22:47 PM ET 2006-10-17T22:22:47

Yahoo Inc.’s third-quarter profit slid 38 percent amid slowing revenue growth that has raised investor doubts about the Internet bellwether’s strategy and execution. Tuesday’s disappointing results were compounded by a dimmed outlook for the current quarter.

But Yahoo Chairman Terry Semel offered hope for a turnaround next year by acknowledging the company’s recent difficulties and vowing to fix them with a “back to basics” approach. The promise helped lift Yahoo’s sagging stock price, which surged by nearly 5 percent in extended trading.

“I am not satisfied with our current financial performance, and we intend to improve it,” Semel told analysts during a conference call Tuesday. “We are not exploiting our considerable strengths as well as we should be.”

The Sunnyvale-based company said Tuesday that it earned $158.5 million, or 11 cents per share, for the three months ended in September. That compared with net income of $253.8 million, or 17 cents per share, in the same period last year.

The quarters weren’t totally comparable because of new accounting rules requiring Yahoo to deduct the cost of employee stock options from this year’s profit.

Still, the results matched analyst expectations, according to Thomson Financial.

Revenue for this year’s quarter totaled $1.58 billion, a 19 percent increase from $1.33 billion last year.

After subtracting commissions Yahoo paid its advertising partners, third-quarter revenue totaled $1.12 billion, slightly below analyst expectations that had been lowered by Yahoo management a month ago.

Yahoo didn’t give investors any reason to feel better about the fourth quarter, traditionally the company’s most lucrative because the holiday shopping season encourages more advertising.

Excluding ad commissions, Yahoo forecast its fourth-quarter revenue will range from $1.15 billion to $1.27 billion. The average analyst estimate had been $1.30 billion, according to Thomson Financial.

Wall Street has been frustrated with Yahoo for most of this year, largely because the company hasn’t been targeting online ads as effectively as Google Inc., the Internet search leader that runs the Web’s largest marketing network.

Although Yahoo continues to run the most trafficked Web site on the Internet, the company faces stiff challenge from recent upstarts like News Corp.’s MySpace.com, Facebook.com and YouTube.com, which Google is buying for $1.65 billion.

The problems have battered Yahoo’s stock price, which has dropped by 38 percent this year. Yahoo shares dipped 3 cents Tuesday to close at $24.15 on the Nasdaq Stock Market, then gained $1.14, or 4.7 percent, to $25.29 in extended trading.

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