March 23 (Bloomberg) -- Yahoo! Inc. tracks the progress of Panama, its new Internet advertising program, with multicolored electronic charts that update by the minute in a Burbank, California, office building.

In its first six weeks, the results lit up both Yahoo's darkened operations room and its prospects for gaining ground on Google Inc. The rate of clicks on Yahoo ads rose about 10 percent compared with the old software, according to AQuantive Inc., the biggest U.S. online ad agency.

``It's just working quicker and better than people had expected,'' said UBS AG analyst Ben Schachter in New York. He said he hadn't expected any increase this quarter.

The gains may boost Yahoo's revenue growth from searches to more than 20 percent in the second half of this year, instead of his estimate of as little as 15 percent, Schachter said.

Sunnyvale, California-based Yahoo, owner of the most-visited U.S. Web site, is trying to close a gap in Internet searches with Google and tap increasing demand for online ads. Google, based in Mountain View, California, may post net sales of more than $12 billion this year compared with $5.47 billion at Yahoo, according to a Bloomberg survey of analysts.

Semel's Milestone

The debut of the ``Project Panama'' software is a milestone for Yahoo Chief Executive Officer Terry Semel, who faced calls for his resignation last year after the program was delayed and sales growth fell to the slowest rate in five years.

``It's clear that Panama will put Yahoo in a stronger position,'' Semel, 64, said today in an e-mailed statement. ``We're still in the early stages and continue to learn and fine- tune our system.''

The stock has gained 23 percent this year after losing 35 percent in 2006. The shares rose 10 cents to $31.36 at 4 p.m. in Nasdaq Stock Market trading.

``It sounds like they've really found a formula that could cause that revenue to reaccelerate,'' said Walter Price, a fund manager at RCM Capital Management in San Francisco that oversees $152 billion including Yahoo shares. It still will be a tough slog, he said. ``Google isn't sitting still.''

Advertisers bid for ``sponsored'' links on Yahoo and Google, owner of the most-used search engine. The ads are typically four lines of text down the right side of search screens. The companies get paid only if a user clicks on a link to look at the underlying site. The more clicks, the more the search companies make.

Panama makes ads more relevant to search queries and more likely to be clicked on. It does this by taking into account how many times ads are clicked -- a measure of their usefulness --as well as the price companies bid for their spot on the search screen. Previously, Yahoo ranked ads based solely on the price bids.

More Relevant

A Yahoo search for ``cocktail dress'' two months ago may have produced ads for online merchants such as EBay Inc. Today, the links are more targeted, with links such as ``Buy Cocktail Dresses at Macy's'' and ``Cocktail Dresses at Nordstrom.com.''

``Click-through rates'' on Yahoo ads rose 5 percent in the week after Panama's debut on Feb. 5 from the week before, said Reston, Virginia-based ComScore, which tracks Web use. The rate rose 9 percent the following week.

``We actually have been pleasantly surprised,'' said Mark Simon, a vice president at Rockville Centre, New York-based ad agency Did-It.com. He said Yahoo's share of ad spending by his clients, which include AT&T Inc.'s mobile-phone unit, rose to about 27 percent from 24 percent from November to February.

Click Rates

Matthew Greitzer, who oversees search-ad buying at AQuantive's Seattle-based agency Avenue A/Razorfish, said the click rate on clients' spots has risen about 10 percent since Panama's debut.

A 10 percent gain in the click rate may mean a 5 percent increase in Yahoo's sales this quarter, or about $25 million, said Safa Rashtchy, an analyst at Piper Jaffray & Co. in East Palo Alto, California.

Yahoo said in January that it didn't expect Panama to boost sales until the second quarter.

``It's a race now,'' said Mark Morrissey, a Yahoo senior vice president who was recruited from International Business Machines Corp. to help oversee Panama.

The software's name is a nod to the construction of the Panama Canal, a 10-year-long battle with mud and mosquitoes. To boost morale, Yahoo held monthly beer parties and gave out ``Teddy Awards'' named for President Theodore Roosevelt, who oversaw the canal's construction 100 years ago.

`Hard Year'

``Last year was a hard year,'' Yahoo Senior Vice President Tim Cadogan said. ``We were taking a lot of heat from the outside.'' The biggest complaint was the time it took for Yahoo to build a search advertising project to rival Google's.

Beginning in September 2005, a group of 15 executives met daily at 10 a.m. in a room called ``Cranium'' to track the progress of the hundreds of engineers assigned to the project. More than ten thousand server computers were installed in four countries to support the software.

Yahoo trails Google in Web searches, limiting potential gains from Panama. Google handled 48 percent of searches in the U.S. in February, up from 42 percent a year ago, and Yahoo was little changed at 28 percent, according to ComScore.

``I suspect that they are holding their breath to see if they can get long-term continuous improvement,'' said Ellen Siminoff, CEO at Efficient Frontier Inc., an ad agency in Mountain View whose clients include Web loan company LendingTree Inc. ``This is a beginning, not an end.''

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

Last Updated: March 23, 2007 16:15 EDT