Yahoo's profit doubled to $312m or 24 cents a share for the last quarter of 2010, beating market expectations.
Although ahead of the average expectations of profits of only 22 cents a share, sales fell 4% compared with the same period the year before, taking revenues down to $1.2bn.
Yahoo's search revenue fell 18% compared with 2009 to $388m in the quarter, but chief executive Carol Bartz was upbeat, describing the quarter and the year as "encouraging".
For the year, operating income, margins, earnings per share and return on invested capital doubled, she said.
Bartz also highlighted the completion of the North America Search transition to Microsoft on schedule and the introduction of new and updated products at a faster pace.
"Our content properties, such as Yahoo Sports and Yahoo Finance continued to innovate and extend their massive lead," she said.
Despite continuing to lose market share to rivals, Bartz said plans to turn round Yahoo were gaining momentum, and the company reported that display advertising revenue increased 16% to $567m in the last three months of 2010.
However, according to research firm eMarketer, Yahoo's US display revenue share slipped slightly to 16.2% for 2010, while Facebook's share nearly doubled to 13.6% cent and Google's more than doubled to 9.6%.
Yahoo laid off hundreds of employees in December and announced a smaller round of lay-offs affecting 1% earlier this week, but the company continues to take on employees in mobile, social and other key areas.
Bartz said Yahoo's overall headcount would grow in 2011, but labour costs would be flat as it adds staff in developing markets.