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Updated from Tuesday, April 21



beat Wall Street's first-quarter profit target Tuesday, but said it will cut another 5% of its staff, or approximately 700 jobs.

The Sunnyvale, Calif., Internet shop posted adjusted earnings, excluding one-time items, of 15 cents a share, down from 18 cents a share last year, but that was better than analysts' expectations for an 8-cent profit.

When items were counted, Yahoo! had net income of $118 million, or 8 cents a share, below last year's $537 million and 37 cents a share. The 2008 quarter included a noncash gain of $401 million related to the initial public offering of


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Sales for the quarter ended last month were $1.58 billion, a 13% decrease from $1.82 billion in the year-ago period. Excluding traffic acquisition costs, revenue dropped to $1.16 billion from $1.35 billion.

"While we experienced pressure in both display and search advertising in the first quarter, we believe Yahoo! remains one of the most compelling advertising buys on the Internet," CEO Carol Bartz said in a press release.

Looking ahead, Yahoo! says second-quarter operating income, before depreciation and stock-based compensation charges, will be $375 million to $425 million. Sales, including traffic acquisition costs, are expected to be $1.43 billion to $1.63 billion.

Yahoo!'s results may be enough to mollify investors who are eager to see some dramatic changes to the business like a search deal with



, which could be in the works.


, citing people familiar with the matter, reports Microsoft has stepped up discussions with Yahoo! about a partnership designed to challenge



in the Internet-search market.

Qi Lu, president of Microsoft's online services unit, and Charles Songhurst, an executive who helps oversee acquisitions, are involved, said one of the people,


reports. The outcome of the negotiations is probably several weeks away.

As for the cuts, Yahoo! said it is looking to remove 5% of its headcount worldwide, in order to "allow flexibility for accelerated strategic investments and targeted hiring in its core operations." The notifications to employees will go out within the next two weeks.

Yahoo! is the second Internet giant to beat expectations recently. Rival Google posted a strong first-quarter performance last week, and it seems Yahoo! may have enjoyed the same trends.

Shares of Yahoo! rose 72 cents, or 5.3%, to $14.38 in regular trading and gained another 40 cents to $14.78 after the close.