Although the reduction means that Yahoo's immediate windfall from the Alibaba IPO will be smaller, it's also a long-term bet on Alibaba's success. Analysts say Alibaba's IPO could be bigger than Facebook's $16 billion stock debut two years ago, which would make Alibaba the biggest tech IPO ever.
Yahoo earned $270 million, or 26 cents per share, in the March-June quarter. That's down from $331 million, or 30 cents per share, in the same period a year earlier. Adjusted earnings were 37 cents per share in the latest quarter.
Revenue fell 4 percent to $1.08 billion from $1.14 billion. After subtracting commissions paid to Yahoo's ad partners, revenue totaled $1.04 million, down 3 percent from $1.07 billion a year ago.
Analysts were expecting adjusted earnings of 39 cents per share and post-commission revenue totaling $1.09 billion, according to Zacks Investment Research.
CEO Marissa Mayer said the company was "not satisfied" by the results.
"(We) saw display revenue decline, further highlighting the fact that we need to work faster to ameliorate the negative trends," she said in a statement. "I believe we can and will do better moving forward."
Yahoo has seen its key display advertising sales slump amid competition from No. 1 Google Inc. and No. 2 Facebook Inc. Even Microsoft Corp. is catching up. Research firm eMarketer, which tracks digital advertising, expects Microsoft to surpass Yahoo to take the No. 3 spot in the worldwide digital ad market.
Mayer has been trying to turn Yahoo's business around, but she has acknowledged that it will take "multiple years."
For the current quarter, Yahoo expects revenue after ad commissions in the range of $1.02 billion to $1.06 billion. Analysts polled by FactSet were expecting $1.1 billion.
Shares of Yahoo, which is based in Sunnyvale, California, fell 76 cents, or 2.1 percent, to $34.85 in extended trading. The stock had closed at $35.61, down 9 cents for the day and nearly 12 percent since the start of the year. By comparison, the Standard & Poor's 500 index is up 7 percent this year.