2nd UPDATE: Yahoo CEO Sees 'Less Fear' In Marketplace

Saying it was too early to call a bottom to the economy, Yahoo Inc. (YHOO) Chief Executive Carol Bartz said Tuesday the Internet giant was ramping up investments so it could seize the growth opportunities that will come when the recovery begins.

"Overall we're seeing less fear in the marketplace, and advertisers are planning their spending more actively than they did earlier this year," Bartz said during a conference call with analysts after the company reported lackluster second-quarter results and a disappointing third-quarter forecast.

The company squeezed out a slightly better than expected profit in the second quarter as it slashed expenses enough to offset a sharp decline ad revenue.

Citi analyst Mark Mahaney said in a note that Yahoo showed "very impressive cost controls," despite mixed fundamentals.

"Yahoo (is) clearly managing costs, with greater-than-expected sales and marketing leverage, and a less-than-expected grss margin decline," he wrote.

But Bartz and recently appointed Chief Financial Officer Tim Morse said the struggling Internet giant would increase spending by $75 million in the third quarter to redevelop its technology platform, bolster its marketing campaign and develop its ad platforms.

The Sunnyvale, Calif.-based company indicated the investments would come at the expense of short-term margin growth.

"Over the long term I think we both guarantee we're going to drive margin expansion, just in the interim here, you know, there are things we've got to get done and there's a lot we don't control in the economic climate," Morse told analysts.

"We've drained all the right buckets and now we're filling back up different buckets," said Morse, the former CFO at semiconductor company Altera Corp. (ALTR) who joined the Internet giant on July 1.

Bartz praised Microsoft Corp. (MSFT) for its new Bing search engine, which was launched at the beginning of June.

"It's only a month into it so it's pretty hard to understand whether it's just curiosity driving what's happening or they're actually going to gain share, but I think Microsoft should be given kudos for Bing," she said. Technology blog All Things Digital said last week that talks between Yahoo and Microsoft to secure a search and online advertising pact had heated up once again and could result in an agreement within the next week.

Yahoo declined to comment on the report, but Bartz has publicly said she would agree to a partnership with Microsoft for the right price and assurances her company would have adequate access to users' search data, which is critical so that Yahoo can better target ads to people who are most likely to be receptive to them.

Analysts believe any deal would see Yahoo receive a large lump sum and be guaranteed billions more dollars spread over several years. Yahoo also could reap annual savings estimated at $500 from not having to run its own search engine.

Yahoo also announced Tuesday it had redesigned its home page so users could easily add custom Internet, such as social-networking services like Facebook and Twitter. Bartz told analysts the redesign would create new opportunities for users and advertisers to try new things, all of which would lead to revenue growth "over time."

Yahoo has struggled to find its footing amid intense competition from Google Inc. (GOOG), which dominates the search market and is more effective at making money from search ads. Yahoo is also contending with a slowdown in display advertising spending, a key market to which Yahoo is more heavily exposed than Google or Microsoft.

Yahoo's U.S. search engine market share has stabilized at about 20%, a distant second to Google's 65%, but higher than Microsoft's 8% share, according to research group comScore Inc.

Shares in Yahoo were trading at $16.30 after closing the regular session at $16.75.

-By Scott Morrison, Dow Jones Newswires; 415-765-6118; [e-mail]