NEW YORK (CNN/Money) - Martha Stewart Living Omnimedia, the New York lifestyle media and merchandising company, offered investors starved for good news a glimmer of hope in an otherwise grim earnings report Tuesday.

The company said Martha Stewart Living, its flagship magazine and key source of revenues, is expected to see ad pages grow more than 30 percent in the current quarter. Revenues are on track to increase at an even faster rate.

CEO Susan Lyne told analysts during a conference call that the company is not discounting rates to give advertising a much-needed boost. What's more, early next year the company expects to increase the magazine's 1.8 million rate base, which is the minimum circulation that publishers guarantee advertisers.

The signs of life at the magazine won't make up for the steep losses of the last three years.

"Things are getting better, but they were so bad that they had do," said Dennis McAlpine, an independent media stock analyst. "Is there a real turnaround here? It's way too early to tell."

Martha Stewart Living Omnimedia (Research) posted an operating loss for the first quarter of $19.8 million, or 37 cents a share, narrower than the operating loss of $16.5 million, or 39 cents a share, for the first quarter of 2004. The higher per-share return despite a bigger loss in the quarter compared to a year ago was due to an increase in shares outstanding.

For the quarter ended March 31, the firm's net loss narrowed slightly to $19.2 million, or 38 cents a share, from $19.5 million, or 39 cents, a year earlier. Analysts, on average, expected a loss of 28 cents a share, according to First Call.

First-quarter revenue fell 13 percent, to $38.7 million, compared to the prior year's quarter amid lower Martha Stewart product sales, ongoing advertising losses at Martha Stewart Living magazine, and a steep drop in television revenues from the September 2004 suspension of Stewart's daily syndicated show.

There wasn't a lot of cheer in the report, except for reassurance by company executives that they are seeing signs of a turnaround.

"Significant improvement in our operating results will take time," Lyne said. Pointing to a "positive uptick in ad sales," plans to revive its decimated television unit, and newly-announced deals with Sirius Satellite Radio and Warner Home Video, Lyne said company officials "believe we are seeing early signs of a recovery."

Lyne added that Stewart's return following a five-month prison sentence "has energized the entire company."

Investors weren't mollified. Shares fell three percent in morning trading Tuesday. The stock is down 45 percent from a 52-week high reached in February -- just two weeks before Stewart was let out of prison.

It's been a rocky few years for the once-thriving lifestyle company whose identity and finances are inextricably linked to founder Martha Stewart.

Three years ago, Stewart was ensnared in a personal stock scandal that eventually led to her indictment and criminal conviction on charges she lied to government prosecutors. After spending five months in prison, she is now serving five months of home detention, ending in August.

Today, the makings of a long-awaited rebound seem to be in place. Advertisers appear to be coming back. Stewart is on deck to star in a revived daily syndicated show, which should generate advertising revenues and licensing fees for the company.

There's also talk of Stewart hosting a spinoff of "The Apprentice" reality show, although the company won't gain financially from the primetime program.

What's more, Martha Stewart Living recently struck a deal with Sirius Satellite Radio in which the No. 2 satellite operator will pay for the development of an around-the-clock lifestyle channel and guarantee at least $30 million in revenues. The company also announced Tuesday a deal with Warner Home Video to create a line of "how-to" DVDs, to be released later this year.

Warner Home Video is a unit of Time Warner Inc. (Research), parent of CNN/Money.

But just as Martha Stewart Living's current troubles are linked to Stewart's legal woes, the company's revival hinges on Stewart's ability to resurrect her image.

"Her relationship with advertisers is pretty tenuous and she's got to be careful how she handles it," said McAlpine.

Stewart ran into trouble this week when federal probation officers said they were investigating the possibility that she violated terms of her supervised release when she appeared at a magazine celebration in Manhattan last week.

Probation officials had approved her attendance at the event beforehand so it's not clear what prompted the inquiry. But she could be disciplined.

"Advertisers still want to avoid controversy," said McAlpine.

Even if all of the piece of the turnaround puzzle fall in place for Martha Stewart Living, some analysts wonder if the company can ever reach its former glory.

The company faces a level of competition in the lifestyle arena that didn't exist just a few years ago, with scores of magazines dedicated to advising consumers on how to throw parties and create comfortable homes.

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