The price of adverts has dived 24 per cent, contributing to a fall in overall revenues to $1bn (£583m), down three per cent on the year.
To compensate for the poor performance the firm has decided to sell a smaller stake in the lucrative Chinese website Alibaba.
Yahoo owns almost a quarter of the e-commerce firm, and was planning to sell as many as 208m shares in the company;s upcoming stock market flotation.
Instead, it will now sell up to 140m, in a flotation expected to value Alibaba at as much as $130bn.
Yahoo shares slid 0.25 per cent.