April 17 (Bloomberg) -- Yahoo! Inc. Chief Executive Officer Terry Semel said in January the company's new Panama advertising program wouldn't boost sales until the second quarter. He may have been wrong.

Yahoo, the owner of the most-visited U.S. Web site, today may say sales rose 11 percent in the first quarter, which included two months of Panama ads. Sales probably reached $1.21 billion, according to the average estimate of 26 analysts surveyed by Bloomberg. Net income may have been little changed at $158.7 million, or 11 cents a share.

At least three analysts raised their first-quarter revenue estimates in the past two weeks, citing Panama's surprising success in getting users to click on ads that appear alongside search results.

``We all thought it would take longer to produce such strong results,'' said Marianne Wolk, a Susquehanna Financial Group analyst in New York who last week raised her revenue estimate for the first quarter by about $15 million. She rates the shares ``positive'' and doesn't own them.

Panama is designed to make so-called sponsored links more relevant to users and more likely to be clicked. Sunnyvale, California-based Yahoo gets paid each time the links are clicked to disclose the underlying sites. Its click-through rate rose 4 percent in February from the previous month, according to research company ComScore Inc. in Reston, Virginia.

High Expectations

Panama's success helped spur a 23 percent rise in Yahoo's shares in the first quarter. The stock rose 16 cents to $31.77 at 9:50 a.m. in Nasdaq Stock Market trading.

``We're starting to smile,'' Semel said about Panama's gains at an investor conference March 6.

Released in the U.S. on Feb. 5, the ad program is now being introduced in other countries, starting with Japan. Yahoo spokeswoman Joanna Stevens declined to comment for this story.

``The stock is riding a decent amount of expectation,'' said Brian Bolan, an analyst for Jackson Securities in Chicago, who rates the shares ``hold'' and doesn't own them. ``If the numbers aren't what Wall Street wants, then you're really going to hear some big cries.''

Bear Stearns & Co. analyst Robert Peck in New York last week raised his sales estimate for Yahoo's first quarter, while Anthony Noto at Goldman, Sachs & Co. increased his estimate on April 5. Both cited data showing users clicked on more ads.

Chasing Google

Internet-search ads account for about 40 percent of Yahoo's net sales, according to Noto. Another 40 percent comes from sales of branded advertising, which include banner ads and other promotions. Subscription services such as fantasy-sports leagues account for the remainder of revenue.

Branded-ad revenue probably rose 24 percent to $490 million, while search-ad sales rose 5.1 percent to $485.9 million, New York-based Noto said in an April 10 note.

Semel, 64, reorganized Yahoo in December. He promoted Chief Financial Officer Susan Decker to oversee all ad sales and put Farzad Nazem in charge of a new technology group. The company hasn't yet named an executive to oversee its audience group, which focuses on products. It also hasn't hired a new CFO to replace Decker.

The gains from Panama will be limited by how many people use Yahoo to search the Internet. Yahoo handled 28 percent of U.S. Web queries in February, unchanged from a year ago, according to ComScore. Google's share rose to 48 percent from 42 percent, ComScore said.

Google's expanding lead means the Mountain View, California- based company is growing faster than Yahoo. Google's sales last quarter jumped an estimated 73 percent to $2.65 billion, according to a Bloomberg survey. The company reports on April 19.

``That's the biggest challenge for Yahoo,'' said Paul Keung, an analyst at CIBC World Markets in New York. He rates the stock ``sector perform'' and doesn't own it. ``What can they do better than Google?''

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

Last Updated: April 17, 2007 09:57 EDT