Updated from 4:40 p.m.

Yahoo!

(YHOO)

surged 6% late Tuesday after matching first-quarter earnings targets.

The Sunnyvale, Calif., Internet giant made $160 million, or 11 cents a share, for the quarter ended March 31. That's down from the year-ago $204 million, or 14 cents a share. So-called net revenue, excluding the fees that Yahoo! shares with its advertising partners, rose to $1.09 billion from $821 million a year earlier.

Analysts surveyed by Thomson Financial were expecting the company to post an 11-cent-a-share profit on net revenue of $1.08 billion.

Yahoo! also guided to a second-quarter top line of $1.08 billion to $1.16 billion, and a full-year net revenue line of $4.6 billion to $4.85 billion. Those figures are in line with the Thomson Financial targets.

"The expectations going into the quarter weren't very high," says Martin Pyykkonen, an analyst with Hoefer & Arnett, who rates Yahoo! shares strong buy with a $45 target. "Overall, it was an in-line quarter with in-line guidance."

Gross revenue rose 34% from a year ago to $1.57 billion, with marketing services revenue rising 35% to $1.38 billion and fees revenue adding 25% to $186 million. Operating income dropped 19% from a year ago to $201 million, as stock compensation expense surged to $109 million from $9 million a year earlier.

Operating income before depreciation and amortization rose 26% from a year ago to $435 million, while free cash flow rose 8% from a year ago to $343 million.

"Sentiment on this name is pretty weak,'' says Darren Chervitz of Jacob Asset Management, which owns Yahoo! shares among its $116 million in assets under management. "It's not like in prior years, where meeting estimates wouldn't do it. It's not a great blowout quarter by any stretch of the imagination, but they were able to show a little growth from the fourth quarter and that's at least a good sign.''

The news comes as Internet investors are

betting on a long-awaited jump in Yahoo!'s downtrodden stock. Yahoo! shares have fallen 20% this year after a flattish 2005, while rival

Google

(GOOG) - Get Report

has held its ground after doubling last year.

Yahoo! is the first of the large-cap Internet companies due to report results.

eBay

(EBAY) - Get Report

is set to report after the market closes Wednesday and Google Thursday.

In a conference call after the earnings release, CEO Terry Semel said was optimistic about Yahoo!'s competitive position. He said the company would provide details on the much-awaited improvements to its search engine at its investor meeting in May. The improvements will be rolled out in three phases.

"Our goal is to complete this rollout in a way that is most productive for our advertisers," Semel says. "We have enormous opportunties ahead and I believe the right people, resources and strategy to get there."

Yahoo! also saw 15% to 20% gains in search queries in the U.S., undermining third-party data that suggest the company's market share is declining, says Chief Financial Officer Susan Decker.

"This is a one-time disclosure to clarify trends," she says. "Strategically, we believe we are in the sweet spot of online marketing services."

Late Tuesday, Yahoo! rose $1.81 to $33.11.