April 17 (Bloomberg) -- Yahoo! Inc.'s first-quarter profit and sales trailed analysts' estimates after a new advertising program failed to generate the revenue gain some investors expected. The shares dropped in extended trading.

Net income fell 11 percent to $142 million, or 10 cents a share, from $159.9 million, or 11 cents, a year earlier, Yahoo said today in a statement. Sales rose 9 percent to $1.18 billion, excluding revenue passed on to partner sites.

Investors may have to wait longer to see sales gains from Project Panama, an advertising program designed to help Yahoo catch up with Google Inc. in the Internet-search ad market. Some analysts, encouraged by signs Yahoo users were clicking on more ads, had increased their revenue estimates for the company in the past two weeks.

``Investors have confused the initial success that Yahoo has had with Panama with the overall company performance,'' said Jordan Rohan, an analyst at RBC Capital Markets in New York. He rates Yahoo shares ``outperform'' and doesn't own them. ``The company clearly is still in transition.''

Fourteen analysts in a Bloomberg survey had estimated profit of 11 cents in the first quarter. Yahoo, based in Sunnyvale, California, was estimated to report sales of $1.21 billion.

Shares of Yahoo fell $2.55, or 7.9 percent, to $29.54 in extended trading after the report. They had climbed 48 cents to $32.09 at 4 p.m. New York time in Nasdaq Stock Market trading.

EBay Partnership

Yahoo, owner of the most-visited U.S. Web site, also expanded an accord that combines EBay Inc.'s PayPal payment service with Yahoo's search ads. About 2,500 merchants are using the program, which puts a shopping-cart icon into Yahoo ads for merchants that support PayPal.

For the second quarter, Yahoo said net sales may be $1.2 billion to $1.3 billion, compared with the average analyst estimate of $1.28 billion. For the full year, Yahoo maintained an earlier sales forecast of as much as $5.45 billion.

``We've made clear our intention to sharpen Yahoo's focus,'' Chief Executive Officer Terry Semel said on a conference call. ``We know there is still much more to do and room for more continued growth across our business.''

Yahoo's ad revenue last quarter rose 6 percent to $1.47 billion, reflecting sales of banner ads and text links that appear next to search results. Fees for subscription services, such as online-dating programs, gained 9 percent to $203 million.

`Heightened Expectations'

Analysts such as Goldman, Sachs & Co.'s Anthony Noto and Bear Stearns & Co.'s Robert Peck had raised their first-quarter sales estimates for Yahoo this month, citing data showing users clicked on more ads.

``The stock should be weak as results were well below heightened expectations and the growth does not justify the value,'' New York-based Noto said today in a note.

Sales growth at Yahoo probably won't match that of Google in the first quarter. Analysts estimate sales growth of 73 percent for that company, which is gaining market share and improving its own advertising software.

For Yahoo, ``there was slight hope for upside this quarter because of Panama,'' said Gene Munster, an analyst at Piper Jaffray & Co. in Minneapolis. ``Hope springs eternal for Yahoo, and we didn't get it.''

Yahoo's international sales rose 22 percent to $571 million from a year earlier. U.S. sales were little-changed at $1.1 billion.

Chasing Google

The company's share of U.S. Web search queries was unchanged in March at 28 percent, compared with the same month a year ago, according to ComScore Inc. Google's share rose to 48 percent from 43 percent, the Reston, Virginia-based research firm said.

Yahoo also said today that it renewed an agreement to provide search features and advertising to Internet service United Online Inc.

Semel, 64, announced a reorganization of Yahoo in December, promoting Chief Financial Officer Susan Decker to oversee all ad sales. He put Farzad Nazem in charge of a new technology group. The company didn't announce a replacement for Decker today or an executive to oversee a new ``audience'' group, which focuses on developing products.

The initial positive reviews of the Panama ad project were already priced into Yahoo's stock, which rose 23 percent in the first quarter, said Youssef Squali, an analyst at Jefferies & Co. in New York. He rates Yahoo ``buy'' and doesn't own the shares.

Decker said today that Yahoo should see ``modest'' gains in revenue from each Web search in the second quarter. Those increases should be at least 10 percent in the second half of the year, she said.

DoubleClick Purchase

Yahoo generates about as much revenue from Internet-search ads as it does from so-called branded advertising, which includes graphical ads and video spots, Goldman's Noto said in a note earlier this month.

Google made a renewed push into the branded advertising market last week when it agreed to buy DoubleClick Inc. for $3.1 billion, its biggest-ever acquisition. DoubleClick brokers ads that appear on sites across the Web and offers software to help clients track their campaigns.

Semel said today that the acquisition validates Yahoo's strategy of developing its own branded-advertising business.

To contact the reporter on this story: Jonathan Thaw in San Francisco at jthaw@bloomberg.net

Last Updated: April 17, 2007 19:53 EDT