Yahoo Inc (YHOO.O) had signed a search advertising deal with Google Inc, providing a potential boost to Marissa Mayer's efforts to turn around the company, which also reported revenue and profit that fell short of market estimates.
The deal with Google, a unit of Alphabet Inc (GOOGL.O), builds on an existing search partnership Microsoft Corp (MSFT.O) under which Yahoo gets a percentage of revenue from ads displayed on its sites.
Yahoo, whose shares were down 1.6% in after-hours trading, said the companies have agreed to delay implementation of the deal in the United States to allow the antitrust division of the Department of Justice to review it.
Yahoo has been struggling to boost revenue from ad sales in the face of stiff competition from Google and Facebook (FB.O).
The Google deal was one of the few bright spots included in the company's third-quarter results statement.
Yahoo said it expected fourth-quarter revenue of $1.16 billion–$1.20 billion, well below the average analyst estimate of $1.33 billion, according to Thomson Reuters I/B/E/S.
Mayer, in her fourth year as chief executive, said the forecast was "not indicative of the performance we want."
"We are also experiencing continued revenue headwinds in our core (advertising) business, especially in the legacy portions," Mayer said on a call with analysts.
Yahoo said the proposed spinoff of its 15% stake in Chinese e-commerce giant Alibaba Group Holding Ltd (BABA.N) - a key issue for shareholders - may now close in January.
Yahoo earlier this year sought a private letter ruling from the Internal Revenue Service to confirm whether the transaction, worth about $27 billion currently, would result in a tax obligation. The tax agency denied the request, but Yahoo said it would go ahead with the spinoff by year-end anyway.
Many analysts attribute little value to Yahoo's core business without its Asian assets, which also include a 35% stake in Yahoo Japan Corp (4689.T).
Apart from the Google deal, the only other good news came results came from Yahoo's emerging businesses, which Mayer calls Mavens - mobile, video, native and social advertising.
Revenue in that area rose 43% to $422 million in the quarter. Native advertising refers to ads that blend into the type and style of the content being viewed.
Excluding items, the company earned 15 cents per share, missing the average analyst estimate of 17 cents.
Revenue after deducting fees paid to partner websites fell to $1.0 billion from $1.09 billion, and the company forecast a drop to $920 million-$960 million in the current quarter.
Traffic acquisition costs, the amount Yahoo spends to attract users to its websites, jumped to $223 million in the quarter from $54 million a year earlier.
GAAP revenue rose 6.8% to $1.23 billion, falling short of the average analyst estimate of $1.26 billion, according to Thomson Reuters I/B/E/S.
Through Tuesday's close of $32.83, Yahoo's shares had lost 35% this year.