April 22 (Bloomberg) -- Yahoo! Inc. had its first profit increase in two years because of a gain from a stake in Alibaba.com Ltd., results that may fail to persuade investors to reject Microsoft Corp.'s $44.6 billion takeover offer.

Yahoo, owner of the second most popular Internet search engine, said first-quarter net income rose to $542.2 million, or 37 cents a share, helped by a $401 million gain from the initial public offering of China's Alibaba.com. The company's forecast for the current quarter was in line with analysts' estimates.

The earnings didn't spur much enthusiasm from investors looking for Yahoo Chief Executive Officer Jerry Yang to put up numbers high enough to squeeze a better offer from Microsoft. Yahoo shares fell after the report. Microsoft has threatened a proxy fight and perhaps a lower price if Yahoo doesn't agree to a deal by this weekend.

``The board should take that money and run,'' Paul Meeks, an analyst at LR Burtschy & Co. in Charleston, South Carolina, said in a Bloomberg Radio interview. ``They needed to show fabulous results and these are good results. I don't know if they're what's necessary to prove to investors they can go it alone.''

Sales, excluding revenue passed on to partner sites, rose 14 percent to $1.35 billion, topping analysts' average estimate. Excluding the gain and the cost of stock options, profit of 11 cents a share beat projections. Net income a year earlier was $142.4 million, or 10 cents, Sunnyvale, California-based Yahoo said in a statement today.

Shares Fall

Yahoo fell 19 cents to $28.35 in late trading after closing at $28.54 on the Nasdaq Stock Market. Since jumping 48 percent on Feb. 1, the day Microsoft announced the bid, Yahoo is little changed. The offer of $31 a share in cash and stock was 62 percent higher than Yahoo's close the previous day.

Yahoo forecast second-quarter operating profit before depreciation, amortization and stock-based compensation of $425 million to $475 million. Analysts on average predicted $456.3 million, according to a Bloomberg survey.

``Within the unique environment of the Microsoft offer, we're very pleased with the execution and performance of the entire team,'' Yahoo Chief Financial Officer Blake Jorgensen said in an interview.

Yahoo changed its revenue forecast to use generally accepted accounting principles and will start treating so-called traffic acquisition costs as a business expense for the first time. On that basis, Yahoo forecast sales of up to $1.93 billion this quarter and as much as $8 billion this year. Traffic costs will be about 26 percent of that, Jorgensen said.

`As Expected'

``The second quarter looks as expected,'' Clayton Moran, a Stanford Group analyst in Boca Raton, Florida, said in a Bloomberg Television interview. He has a ``hold'' rating on Yahoo. ``They are not any better off with this release.''

Yahoo President Sue Decker said the company is seeing a decline in search-related and graphical banner ads from finance and travel companies because of the economic slowdown. Growth in spending by companies in other industries such as technology and telecommunications countered those losses, she said.

Buying Yahoo would help Redmond, Washington-based Microsoft, the biggest software maker, challenge Google in the $41 billion online advertising market, more than half of which comes from Web searches. Google captured 59.8 percent of U.S. queries in March, compared with 21.3 percent for Yahoo and 9.4 percent for Microsoft, said Reston, Virginia-based ComScore Inc.

Google said last week that sales, excluding revenue passed on to partner sites, climbed 46 percent to $3.7 billion in the first quarter.

Falling Behind

Yahoo also has failed to keep pace with the growth of social-networking sites such as News Corp.'s MySpace and Facebook Inc., which attract advertisers looking to showcase their brand with banner and video ads.

In a presentation to investors last month, Yahoo pointed to operations and investments in Asia, its No. 2 position in Web searches and potential cost savings of the deal to show the company was worth more. Yahoo said that sales will climb at least 19 percent in each of the next two years, topping analysts' estimates.

Microsoft responded April 5, saying a slowing U.S. economy had hurt the Internet business. CEO Steve Ballmer threatened to nominate an alternate slate of board members and possibly lower the bid if Yahoo failed to agree to terms in three weeks, a deadline that runs out April 26.

Two days later, Yahoo again demanded a higher bid.

In seeking alternatives to Microsoft, Yahoo was close to a deal two weeks ago to gain control of Time Warner Inc.'s AOL and give Time Warner a 20 percent stake in the combined entity, said a person with knowledge of the talks. Yahoo would have received an investment from New York-based Time Warner, letting Yahoo buy back billions of dollars in stock, the person said.

Google Test

In a separate deal, Yahoo agreed to use some search advertising links sold by Mountain View, California-based Google for up to two weeks. Yahoo also introduced a program that lets clients place ads on more Web sites using a single application.

``We are totally committed to maximizing the value of this asset,'' Yang said today on the conference call.

Ultimately, the other options aren't compelling enough for investors to let the offer from Microsoft go, Collins Stewart LLC analyst Sandeep Aggarwal in San Francisco wrote in a note last week. He put 55 percent odds on a friendly deal being reached before the deadline and 45 percent on a ``less amicable solution'' by July.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

Last Updated: April 22, 2008 19:56 EDT