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Oct. 17 (Bloomberg) -- Yahoo! Inc., which trails Google Inc. in Internet search users, reported a 38 percent drop in third- quarter profit as sales growth fell to the lowest in four years. The company said it began introducing its new advertising software, sending the shares up 5 percent.

Net income declined to $158.5 million, or 11 cents a share, from $253.8 million, or 17 cents, a year earlier, Yahoo said today. Sales excluding revenue passed on to partner sites rose 20 percent to $1.12 billion. Revenue will be $1.15 billion to $1.27 billion this quarter, missing analysts' average prediction of $1.31 billion.

Yahoo's growth was curbed as rival Web sites such as Google, and attracted more advertisers. Yahoo's new advertising technology, known as Project Panama, is designed to help the company compete with Google by offering more relevant ads. The software is being introduced to clients now and the next phase will be installed next quarter, Chief Executive Officer Terry Semel said today.

``This doesn't change my basic belief that Google remains the better horse to ride at this point,'' said Barry Randall, who helps manage $12 billion at MTB Investment Advisors in Baltimore, including Yahoo shares. ``People are seeing that no material change is forthcoming.''

Shares of Yahoo are down 38 percent this year, compared with Google, which is up 1.4 percent. Yahoo stock rose $1.22 to $25.37 at 6 p.m. New York time in extended Nasdaq Stock Market trading.

Yahoo's report, along with International Business Machines Corp., Intel Corp. and Motorola Inc., marked the start of the technology earnings season.

Losing Leadership

``I am not satisfied with our current financial performance,'' Semel said on a conference call with investors after the report. ``We intend to improve it.''

Semel, who trimmed the company's forecast last month amid stalling demand from automakers and finance companies, faces mounting competition from Google, the most-used Internet search engine, as well as friend-finder Web sites including News Corp.'s and

Analysts including Jim Friedland at Cowen & Co., who today downgraded Yahoo to ``neutral'' from ``outperform,'' said sites such as MySpace are gaining a larger share of banner, or display advertising, at Yahoo's expense.


Yahoo's user growth trails that of Mountain View, California-based Google and Los Angeles-based, according to ComScore Networks Inc. Google last week bought YouTube for $1.65 billion, stepping up pressure on Yahoo.

In Web search, Yahoo handled 29 percent of U.S. queries in August, down from 30 percent a year ago, while Google's share rose to 44 percent from 37 percent, according to Reston, Virginia-based ComScore, a market researcher.

``Clearly Google has been taking advantage of them,'' said Richard Prati, chief executive officer of American Technology Research in an interview from Littleton, Colorado. ``They've been consistently disappointing for the past several quarters.''

Google reports results Oct. 19.

``We've got to get back to basics and again zero in on a few key priorities,'' Semel said on the conference call.

Project Panama is one of those. Yahoo three months ago said it was delaying the introduction of the new software, which is designed to sell ads that appear next to search results.

Panama is now being introduced on a market by market basis, Semel said.

Google generates as much as 50 percent more revenue from each search because its ads are more relevant, according to Citigroup Inc. analyst Mark Mahaney.

``It's a bit of a show-me stock right now,'' said Martin Pyykkonen, an analyst with Global Crown Capital LLC in Denver. He rates Yahoo shares ``overweight'' and doesn't own them. ``We need to see Project Panama.''

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