The embattled internet search specialist Yahoo! suffered a fresh fall in profits last night as it lost ground to rival Google - but investors took heart from signs that the company could be turning the corner.

Yahoo's third-quarter net profits fell 5% to $151m (£74m), continuing a long-running decline. But its revenue surged by 12% to $1.76bn and the figures comfortably exceeded analysts' expectations.

In after-hours trading on Nasdaq, shares in Yahoo! jumped 8% on hopes that Project Panama, a widely hyped upgrade to the company's advertising technology, is beginning to reap rewards. "We are encouraged by the early signs of improvement in our business," said Yahoo's chief financial officer, Blake Jorgensen.

Beset by criticism over strategic drift, Yahoo! ditched its chief executive, Terry Semel, in June and co-founder Jerry Yang resumed day-to-day control. Since then, the firm has engaged in a 100-day review to determine a long-term path.

The firm told investors last night that it intended to continue as a broad-based internet advertising outlet in spite of Google's dominance of online searches. According to research firm ComScore, Google accounted for 37bn of the world's 61bn internet searches during August while Yahoo! provided 8.5bn.

On a conference call, Yahoo!'s president, Susan Deckerm suggested that the company's ability to make money out of searches was improving. "I'm very pleased to say our global roll-out of Panama is nearing completion," she said. "Substantially, all of our global advertisers have now been migrated to the new system."

Excluding traffic acquisition costs, Yahoo!'s revenue was up by 13% in the US and by 9% elsewhere in the world.

Jeffrey Lindsay, at stockbroker Sanford Bernstein, said of the result: "It's possibly the least attractive scenario in that it's improved, but only just enough."