Yahoo shares fell more than 6% after second-quarter sales came in at $1.13bn (£7.39bn), failing to reach analyst expectations of $1.16bn.
Carol Bartz, chief executive, said demand for search advertising had slowed during the quarter, but was beginning to return to normal.
"Our top job here is to grow the top line, so we're not trying to squeeze every cost out," she said.
Search advertising was 8% down compared with the same period in 2009, but display advertising was up 19%.
Bartz attributed the growth in display advertising to an increase in demand for the more local, personal and socially-oriented advertising Yahoo is introducing.
Analysts said despite the disappointing sales for the quarter, Yahoo is well positioned for growth because of the trend towards brand-focused and display advertising.