updated 1/23/2007 4:58:49 PM ET 2007-01-23T21:58:49

Yahoo Inc.’s fourth-quarter profit topped analyst expectations to end a recent streak of financial letdowns at the Internet bellwether.

The Sunnyvale-based company said Tuesday that it earned $268.7 million, or 19 cents per share, during the final three months of 2006, traditionally the peak season for Web sites like Yahoo that depend on advertising for most of their revenue.

The profit declined 61 percent from net income of $683.2 million, or 46 cents per share, at the same time in 2005, but the two quarters didn’t provide an apples-to-apples comparison. That’s because a one-time gain of $310 million boosted the 2005 results while the 2006 figures included stock option expenses that weren’t recorded on Yahoo’s books in the previous year.

If not for certain tax benefits, Yahoo said it would have earned 16 cents per share, exceeding the average analyst estimate by 3 cents per share, according to Thomson Financial.

Yahoo’s revenue for the period totaled $1.7 billion, a 13 percent increase from $1.5 billion in the prior year.

In a measure far more important to investors, Yahoo’s revenue fell to $1.23 billion after subtracting advertising commission that the company paid to its partners. That figure represented a 15 percent increase from the prior year and a 10 percent improvement from 2006’s third quarter.

The sequential growth rate carries more weight on Wall Street and help explains why Yahoo’s stock price plunged by 35 percent last year while the shares of rival Google Inc. continued to climb.

Google’s quarter-to-quarter revenue, minus ad commissions, has been accelerating at a far faster pace than Yahoo’s, and the gap appears to be widening. Analysts believe Google will show sequential revenue growth of 17 percent when it releases its fourth-quarter results next week.

Yahoo shares fell 46 cents to close at $26.96 on the Nasdaq Stock Market before the fourth-quarter earnings were announced, then recovered 23 cents in extended trading.

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