By Eric Auchard

SAN FRANCISCO:Yahoo Inc. reported on Tuesday an 11 percent fall in first-quarter profit, missing Wall Street estimates as a new advertising system aimed at clawing back market share from Google has yet to take hold.

Shares of the Internet media company fell 8 percent in extended trade as Yahoo forecast second-quarter net revenue of $1.2 billion to $1.3 billion, compared with analyst forecasts ranging from $1.22 billion to $1.35 billion.

Analysts said Yahoo was unlikely anytime soon to close a widening market share gap in Web search with leader Google Inc.

"We know there is still much more to do and room for more continued growth across our business," Chairman and Chief Executive Terry Semel told investors on a conference call following the report.

Stifel Nicolaus analyst Scott Devitt said it looked like the impact from Yahoo's new Web advertising system, dubbed Panama, has been slower to materialize than investors hoped.

"It looks like they lowered the second quarter (forecast) a little bit," he added. "We would be buying Google on these results. I think it's a market share issue, not a sector issue."

Yahoo's share of the U.S. Web search audience has continued to slip to 27.5 percent of the market, while Google posted fresh gains, to 48.3 percent, according to audience data from comScore Inc. The gap has been widening for a year and a half.

Yahoo said first-quarter net income fell to $142 million, or 10 cents per diluted share, from the year-earlier quarter's $160 million, or 11 cents per diluted share.

Wall Street analysts, on average, had expected a profit of 11 cents per share, according to Reuters Estimates.

'SUB-PAR' GROWTH

Revenue rose 9 percent to $1.18 billion, excluding traffic acquisition costs - the revenue cut Yahoo passes back to affiliated Web sites that run its advertising. International revenue grew 15 percent while U.S. sales rose only 7 percent.

Gross revenue rose 7 percent to $1.67 billion.

Such growth rates are "sub-par" for the highly valued Internet sector, said Goldman Sachs analyst Antony Noto. Google revenue is increasing six to seven times faster.

"The stock should be weak as results were well below heightened expectations and the growth does not justify the value," Noto said in a research note to investors. Nonetheless, the analyst rates the stock as "attractive" relative to peers.

The consensus revenue prediction from Reuters Estimates, excluding traffic acquisition costs, was $1.21 billion, with forecasts ranging from $1.17 billion to $1.24 billion.

Yahoo derives a major chunk of its revenue from selling display advertising - banner ads and the like - to corporate brand marketers. Semel said this business should grow in line with the overall display ad market, which analysts estimate will increase about 20 percent during 2007.

The company had previously cautioned that the first quarter would be the slowest-growing period of the current year.

Later, Semel said in an interview the Panama Web search ad system had shown early signs of success since its introduction in February. Yahoo is expanding Panama overseas this quarter.

"We are feeling very good about everything we saw," Semel told Reuters. "We are right on schedule. The metrics that we are seeing are right on," he said. He reiterated that the financial impact of Panama would only show up in Yahoo results starting in the current quarter and accelerate through 2007.

"Our contacts indicated that Panama hadn't had a meaningful impact on their search spend," Cantor Fitzgerald analyst Derek Brown said, referring to advertisers' willingness to increase spending on Yahoo search advertising using Panama.

"Through the quarter there seemed to be an increasing perspective that Panama was already driving a change in behavior and spending patterns. Our conversations did not seem to corroborate that," said Brown, who rates the stock a hold.

Yahoo shares fell to $29.47 in after-hours trade, after closing at $32.09 before earnings were announced.

Prior to the earning report, investors had bid up Yahoo shares by 25 percent this year, betting it would begin to see accelerated revenue growth in the second quarter, leading to significant revenue gains in the second half of 2007.

Shares of Google have risen just over 2 percent this year.

(Additional reporting by Michele Gershberg)