Yahoo! ( YHOO), whose shares have slumped 12% since it announced last month that upgrades to its search engine would be delayed, should be able to be able to start the project as planned in the fourth quarter, says Mark Mahaney, an analyst with Citigroup.

Wall Street expects the overhaul -- dubbed Project Panama -- to improve the profitability of Yahoo!'s search business, which lags behind leader Google ( GOOG). Yahoo!, which entered search through its 2003 acquisition of Overture, originally anticipated starting Project Panama in the current quarter.

"So, can Yahoo! deliver against its new deadline?" write Mahaney in a note to clients Thursday. "Based on numerous discussions with advertisers, search engine marketers, and company executives, we believe that the answer is a probable yes."

Mahaney, who rates Yahoo! as a buy, is urging investors to be patient, arguing that Project Panama is a difficult undertaking. His firm has received compensation from Yahoo! for both investment banking and noninvestment banking services in the past 12 months.

"Yahoo! has been trying to overhaul an older search engine that it acquired and that currently supports 300,000+ advertisers, without disrupting those advertisers' existing marketing plans," he writes. "We believe that Yahoo! over time lost many of the key Overture engineers, and this hurt them when it came time for the overhaul."

Yahoo! has long been a distant second to Google, though its performance has been showing some signs improvement lately, according to market researchers. Wall Street doesn't expect Yahoo! to overtake Google in search, but wants to see the company improve its performance.

In his note, Mahaney estimates that for every 100 basis points that Yahoo! can improve its clickthrough rate, it can generate 4 cents to 5 cents in incremental earnings. Search is Yahoo!'s largest revenue contributor and highest margin business, he says.

"That's why 'fixing' Yahoo!'s search engine is such an important catalyst -- arguably the biggest catalyst across the Internet sector," he writes.

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