Yahoo’s share price dropped 5% in after-hours trading when the internet firm announced fourth quarter revenues of $1.26bn, down 6% from the same period in 2012.
Full-year revenues also fell 6% to $4.68bn.
Although fourth quarter profits were up 41% to $348.2m, revenues were dragged down by a 6% fall in display advertising to $553m compared with the same period a year ago.
Investor confidence was further knocked by Yahoo’s announcement that it expected current-quarter net income of between $130m-$170m, well below forecasts.
Despite the market response, Yahoo chief executive Marissa Mayer was upbeat. "I'm encouraged by Yahoo's performance in the fourth quarter and 2013 overall,” she said.
Mayer said new products supported by continued stability in the business and investments had established a strong foundation for revenue growth.
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At this year's CES conference in Las Vegas, Mayer unveiled a host of new services which included revamps of existing products as well as acquired products such as news aggregator Summly.
The company has incorporated the news summary technology acquired from UK teenager Nick D'Aloiso into a new Yahoo News Digest service that automatically compiles content chosen by human editors.
“We are extremely heartened by the year-over-year traffic increase we experienced in 2013, an early sign of return on our investments and the acquisitions we've made,” she said.
But 18 months after the former Google executive was appointed to turn around the struggling company, analysts said a lot of questions remained.
Despite efforts to reinvigorate Yahoo’s display advertising business, it is still in decline, Colin Gillis, internet analyst at BGC Partners told the Guardian.
“Display fell 6% in the fourth quarter, which is supposed to be a good quarter for display ads,” he said.
Gillis said many investors now held shares in Yahoo because of its stake in Alibaba, China’s internet giant, and Yahoo Japan, because more of the company's income comes from these investments than the core business.
Yahoo is the second tech firm to be hit by a fall in share price. Apple’s shares hit their lowest point in three months after disappointing quarterly results and a lower than expected revenue forecast for 2014.