Jan. 23 (Bloomberg) -- Yahoo! Inc.'s fourth-quarter profit fell 61 percent on delays in its newest Internet advertising software. The shares rose after Chief Executive Officer Terry Semel committed to having the program out next month.

The company, which trails Google Inc. among Web search engines, said net income fell to $268.7 million, or 19 cents a share, from $683.2 million, or 46 cents, a year earlier. Sales excluding revenue passed onto partner sites rose 15 percent to $1.23 billion, Yahoo said today in a statement.

Semel plans to have the new software out Feb. 5, earlier than his most recent deadline of March. Sunnyvale, California- based Yahoo designed the product to get users to click on more ads and help catch up to Google. The remarks prompted investors to overlook a sales forecast that missed analysts' estimates.

``It's a bit of a relief,'' said Ken Smith, a fund manager at Munder Capital Management in Birmingham, Michigan, which manages $28 billion, including Yahoo shares. ``It's a little bit earlier than people expected, but more importantly there's no further delay.''

Profit, excluding some items, was 16 cents a share, beating the 14-cent average estimate of analysts in a Bloomberg survey. Net income fell from a year ago because of costs for employee stock options and a gain last year from selling Yahoo's China unit to Alibaba.com.

Shares of Yahoo rose $1.50, or 5.6 percent, to $28.46 in extended trading. They had declined 46 cents to $26.96 at 4 p.m. New York time in Nasdaq Stock Market trading and dropped 35 percent last year. Mountain View, California-based Google fell $1.79 to $479.05 and rose 11 percent last year.

Panama

The second piece of Yahoo's new software for selling search ads, called Project Panama, was previously three months behind schedule. It will display ads that users are more likely to click on nearer the top of the page. Because advertisers pay when their ads are called up, the new positioning may generate more revenue.

Yahoo today said it will see the first financial benefits from Panama in the second quarter, when it also will start rolling out the software outside the U.S.

Revenue per search query may grow by 10 percent or more in the second half of the year, Yahoo said.

``By the time we get to 2008 and beyond, this is a very, very significant amount of additional profit,'' Semel said in an interview today.

Forecast Trails

Revenue may fall short of analysts' estimates this quarter and in 2007. Yahoo so far has failed to crack Google's hold on the search market, and new sites such as MySpace.com also are winning more ad sales.

For the first quarter, Yahoo said net revenue will be $1.12 billion to $1.23 billion, trailing the $1.28 billion average estimate in a Bloomberg analyst survey.

Net sales for 2007 will be $4.95 billion to $5.45 billion, which may miss the $5.44 billion estimate in the Bloomberg survey. Analysts in a survey by Thomson Financial estimated $5.47 billion.

``People were hoping for higher guidance than this,'' Safa Rashtchy, an analyst with Piper Jaffray & Co., said in an interview from Menlo Park, California.

Sales growth at Yahoo probably lagged behind the 77 percent gain analysts anticipate for Google. That's because Google's share of the Internet search market is rising and the company is able to generate more revenue from each search.

Yahoo handled 29 percent of Internet searches in the U.S. in December, compared with 30 percent a year earlier, while Google's share rose to 47 percent from 40 percent, according to ComScore Networks Inc., a Reston, Virginia-based firm that tracks Web use.

Semel's Shakeup

Semel, in his sixth year as Yahoo's CEO, last month named Chief Financial Officer Susan Decker to oversee all advertising sales and reorganized the company into three units to spur sales growth.

``I'm pleased with the tangible progress we have already made,'' Semel said on the call. ``I'm convinced we're on the right path.''

Yahoo cut its 2006 sales forecast in October, citing increased competition for advertisers and a slowdown in demand in some industries. Revenue growth in the fourth quarter, usually the company's biggest sales period, had exceeded 35 percent every year since 2001 before today.

Ad revenue rose 13 percent to $1.49 billion, reflecting sales of banner and text-ads that appear next to search results. Fees for services such as online dating gained 15 percent to $213 million.

International sales drove growth, rising 25 percent to $558 million from a year earlier. U.S. sales rose 8 percent to $1.15 billion, Yahoo said.

For 2006, Yahoo's net income fell 60 percent to $751.4 million, while sales under generally accepted accounting principles rose 22 percent to $6.43 billion.

``They're clearly lagging and perhaps still suffering from Panama's delay,'' said Barry Randall, who helps manage about $11 billion at MTB Investment Advisors in Baltimore, including Yahoo shares. ``The struggle continues.''

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

Last Updated: January 23, 2007 19:51 EST