Despite some numbers that don't compare favorably with last year, Yahoo! (NASDAQ:YHOO) executives appear to be happy with the direction the company is heading in. Year-over-year revenue and income fell in Q3, according to its quarterly report today. The revenue drop was 5%, from $1.2 in the third quarter of 2012 to $1.1 billion now.

Yahoo! also saw its earnings fall from $2.64 to $0.28 per share year over year. However, in Q3 2012, the company realized a gain of $2.8 billion from a sale of its portion of Alibaba Group. Excluding for certain items, Yahoo! had $0.34 in EPS in the third quarter, compared with $0.39 for the same period last year.

"I'm very pleased with our execution, especially as we've continued to invest in and strengthen our core business," CEO Marissa Mayer said of the results. "Now with more than 800 million monthly users on Yahoo -- up 20 percent over the past 15 months -- we're achieving meaningful increases in user engagement and traffic."

While the total number of ads sold increased by 1%, its price per ad fell by 7%, resulting in a 7% drop in total display revenue.

"In Q3, we generated free cash flow of $249 million and returned an additional $1.7 billion to shareholders through buybacks," CFO Ken Goldman said. "As we exit Q3, we are extremely pleased with the strength of our balance sheet, with nearly $3.2 billion in cash and securities, and we are well positioned with ample liquidity to fund our future investments for growth." In the third quarter Yahoo! also made eight acquisitions.

In addition to the earnings announcement today, Yahoo! said it has reached an agreement with Alibaba in which it will be required to sell 208 million shares when the Chinese Internet and e-commerce company IPOs, down from a previously announced 261.5 million. 

Fool contributor Patrick Morris has no position in any stocks mentioned. The Motley Fool recommends Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.