Alibaba last month announced that it bought back billions of dollars worth of stock from Yahoo! in a step toward independence from the US Internet pioneer.
The California company's revenue from display advertising was little changed from the same quarter last year but Yahoo! reported its income from ads served up with online search results was up 11 percent.
The earnings topped Wall Street expectations and Yahoo! shares climbed nearly three percent to $16.20 in after-market trading on the Nasdaq.
"Yahoo! had a solid third quarter, and we are encouraged by the stabilization in search and display revenue," said chief executive Marissa Mayer.
"We're taking important steps to position Yahoo! for long-term success, and we're confident that our focus on quality and improving the user experience will drive increased value for our advertisers, partners and shareholders."
Mayer took over in July at Yahoo! after 13 years at Google, in a move aimed at reinvigorating the struggling Internet firm.
The encouraging earnings report marked Mayer's return from maternity leave. She gave birth to a boy early this month.
Alibaba Group Holding Limited has completed an initial repurchase of shares from Yahoo! and "restructured its relationship with the Silicon Valley company" in transactions valued at approximately $7.6 billion.
In May, the companies revealed that more than a year of negotiations had resulted in a deal for Yahoo! to sell back its stake in Alibaba.
The transaction will be carried out in stages, with the first step calling for a repurchase by Alibaba of up to one-half of Yahoo!'s stake, or approximately 20 percent of Alibaba's total shares.
Yahoo! would be paid in a combination of cash and newly-issued Alibaba preferred stock, the firms said.
The US company plans to return $3.65 billion in after-tax proceeds to shareholders, mostly by buying back shares of stock.
Yahoo! reported that it has already bought back $646 million worth of its stock, with $190 million spent on repurchasing shares in the recently ended third fiscal quarter.
It has been trying to reinvent itself as a "premier digital media" company since the once-flowering Internet search service found itself withering in Google's shadow.
Yahoo! in 2009 made a deal with Microsoft to have Bing handle the labor-intensive job of finding and indexing content on the Internet, freeing itself to concentrate on interesting or personalized ways to present results.