Yahoo reported a 23 percent decrease in third-quarter earnings as its search engine revenue halved down from last year. However, its earnings and revenue came in above Street expectations.

The Sunnyvale, California-based tech company posted adjusted earnings of $265.85 million or $0.21 per share, compared to $220.77 million or $0.16 per share last year. Revenue excluding Traffic Acquisition Cost (TAC) declined 5 percent to $1.07 billion.

Analysts polled by Thomson Reuters expected Yahoo to earn $0.17 per share on revenue of $1.07 billion.

Excluding TAC, display revenue rose marginally to $449 million from $448 million, while search revenue decreased 13 percent to $374 million.

The latest quarter results included $53 million in search operating cost reimbursements from Microsoft Corp. under the Search Agreement, the amount of which is equal to the search operating costs incurred by Yahoo in the third quarter.

Microsoft and Yahoo recently agreed to extend the RPS Guarantee in the U.S. and Canada through March 2013. Microsoft and Yahoo remain fully committed to the success of the Search Alliance, and the RPS Guarantee extension represents an important sign of that commitment.

“Search operating cost reimbursements are expected to continue to decline as Yahoo! fully transitions all markets to Microsoft's search platform and the underlying expenses are no longer incurred under our cost structure. Our business outlook for total expenses reflects these anticipated savings,” said Tim Morse, CFO and Interim CEO, Yahoo.

Yahoo's results for the third quarter of 2011 also reflect $4 million in transition cost reimbursements from Microsoft under the Search Agreement. During the third quarter Yahoo's cumulative transition costs exceeded the $150 million reimbursement cap specified in the Search Agreement. Transition costs in excess of the cap will not be subject to reimbursement.

The internet company’s cash flow from operating activities for the third quarter was $356 million, a 3 percent increase from $346 million last year.

Looking ahead into the fourth quarter, the company expects revenue excluding TAC of $1.125 billion to $1.235 billion, while Street estimates $1.22 billion. Revenue is expected to be $1.275 billion to $1.395 billion. Total expenses are expected to be between $1.075 billion and $1.135 billion.

Yahoo stock is trading up 4.46 percent to $16.16 in the pre-market trading on the NASDAQ Stock Market. The stock traded between $11.09 and $18.84 for the past 52 weeks.