Yahoo! Inc. (Nasdaq: YHOO), the No. 2 search engine, said Tuesday its first-quarter revenue increased 1 percent to $1.07 billion from the prior year as Web traffic rose.

Sunnyville, Calif.-based Yahoo had $1.07 billion in revenue, excluding payments to affliliates and partners, up from $1.06 billion in the prior year and beating a Reuters forecast of $1.05 billion. But they were essentially flat.

Diluted earnings per share rose 28 percent to 23 cents, 6 cents above the year-earlier amount and a Reuters forecast of 17.4 cents per share.

Income from operations fell 11 percent to $169 million from $190 million in the first quarter of 2011.

In the first quarter, Yahoo!'s results came in at the high end of our guidance range and beat consensus on revenue and profits, said Scott Thompson, the new CEO. We also made changes to resize the organization and establish a new leadership structure to quickly deliver the best user and advertiser experiences at scale.

Yahoo still lags behind Google Inc. (Nasdaq: GOOG), which reported revenue rose 24 percent $10.65 billion and earnings of $8.75 per share last week.

Yahoo's worldwide traffic in January and February increased 7 percent compared to the prior year. Time on site rose 14 percent in its communications and communities divisions, which include email, messenger and the photo site Flickr, and 8 percent in its media properties, which include sports and business sections.

The company's display ad revenue fell 4 percent to $454 million, but search revenue increased 8 percent to $384 million from the previous year.

Yahoo said it had $297 million in cash flow from operations, up 45 percent from the prior year. It repurchased 5 million shares for $71 million in the first quarter.

The company had cash of $2.65 billion on March 31, up from $2.53 billion on Dec. 31, 2011. It expects revenue of $1.03 billion to $1.14 billion in the second quarter.

Yahoo shares closed Tuesday at $15.01, up 23 cents, down 7 percent for the year and about 10 percent for the past 52 weeks. Thompson's leadership is being challenged by Third Point Capital, a New York hedge fund, which has acquired a 5.2 percent stake and seeks to take over the company at its annual meeting.