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The new requirement for US companies to deduct the cost of employee stock options from their profits led to a 22 per cent fall in reported net income at Yahoo in the first three months of this year, according to figures released on Tuesday.

However, the company’s revenues and adjusted earnings met Wall Street’s forecasts, reflecting a more solid performance than the internet company had shown in its previous quarter, and Yahoo’s shares rose 5 per cent in after-market trading.

“Yahoo is really off to a good start in 2006,” said Terry Semel, chairman and chief executive. While the company does not disclose separately the performance of its search and branded advertising businesses, Mr Semel added: “We achieved balanced growth with contributions across the board,” both by business unit and geographical location.

The robust performance also boosted shares in Google late on Tuesday as Wall Street looked forward to a strong earnings report from the leading search company on Thursday.

Google has steadily taken market share from Yahoo in search advertising in recent months, though Yahoo executives argue that a true comparison is obscured by measurement methods that give disproportionate credit to Google’s success in Europe and do not properly reflect their own company’s performance in Asia.

Yahoo’s results have lagged behind Google’s partly because, on average, it generates less advertising revenue for each search undertaken on its sites. The company has promised a series of improvements in its technology to improve this “monetisation” rate, including better algorithms to improve the relevance of its adverts and a new user interface for advertisers, and Mr Semel said that more details would be given at the company’s analyst day on May 17th.

In the first quarter of this year, Yahoo’s revenues excluding the traffic acquisition costs that it pays to other web sites rose by 33 per cent compared with a year before, to $1.1bn. Marketing services revenues rose by 35 per cent while fee revenue increased 25 per cent, the company said.

Excluding the impact of stock options expenses, Yahoo said its net income in the first quarter would have been $231m, or 15 cents a share, compared with $195m, or 13 cents a share, the year before. As reported, earnings came to just under $160m, or 11 cents a share.

The new rules for stock option accounting, which were strongly resisted in Silicon Valley, came into force for most US companies for the first time in the first quarter of this year.

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