UPDATE 4-IBM raises full-year outlook, posts higher profit

* Raises full-year EPS outlook again

* Q3 EPS $2.40 vs Wall Street forecast $2.38

* Revenue down 7 pct yr-on-yr; sees growth in Q4

* Shares fall 3.88 pct after-hours
(Adds comments, details on Google, background)

By Ritsuko Ando

NEW YORK, Oct 15 (Reuters) - IBM (IBM.N) raised its
full-year outlook and reported higher-than-expected quarterly
profit on Thursday as its growing focus on higher-margin
software and services helped it cope with weak technology
spending.

International Business Machines Corp still failed to
satisfy investors, whose expectations had risen along with a 24
percent rise in the shares over the past three months. A drop
in service contract numbers, an indication of future sales,
also worried Wall Street.

"I think people had expected a bigger upside," said Kim
Caughey, an analyst with Fort Pitt Capital. "If you are someone
who follows technology closely, the third quarter isn't a
strong quarter -- so that they beat at all, I'm happy."

Indeed, IBM reported third-quarter net profit rose to $3.2
billion, or $2.40 a share, from $2.8 billion, or $2.04 a share,
a year earlier. Analysts on average expected a profit of $2.38
per share, according to Thomson Reuters I/B/E/S.

Revenue fell 7 percent from a year earlier to $23.6
billion, but it rose 1 percent from the previous quarter and
was better than Wall Street's forecast of $23.4 billion.

IBM forecast a return to revenue growth in the fourth
quarter and said it was ahead of pace to achieve its target
earnings of $10 to $11 per share in 2010.

Total gross profit margin rose to 45.1 percent from 43.3
percent a year earlier.

ONE CONCERN

One concern among investors was that service contract
signings fell 7 percent $11.8 billion. Such signings are an
indicator of long-term sales.

Despite that decline, Frost & Sullivan analyst Ronald Gruia
said, IBM's results were positive and investors were likely
taking profits.

"Sometimes there are ups and downs," he said. "I think it's
mostly 'sell on the news'-type stuff."

For its part, IBM said the decline in services reflected a
weak business environment, but conditions were stabilizing,
particularly in credit markets.

"What we see more broadly I think is some stabilization in
the economic environment," Chief Financial Officer Mark
Loughridge told analysts on a conference call.

"You remember last time at this point in time, we were
talking about -- questions like, do you have commercial paper
or do you have a financing business? We are certainly through
those kinds of questions."

IBM has managed to escape the worst of the tech downturn of
the past year by shifting more of its sales from servers to
software and services in outsourcing, automation and technology
support -- areas that have remained relatively strong as
companies seek ways to cut costs.

"Corporate spending is very much starting to show some
rebound," said Keith Wirtz, president and chief investment
officer at Fifth Third Asset Management.

"As we look at the tech space, we think the general tone in
this reporting cycle and for the next several quarters will be
better than expected."

IBM shares, which had risen on hopes of a recovery in
technology spending, fell 3.88 percent to $123.01 in extended
trading after closing at $127.98 on the New York Stock
Exchange.

That was in contrast to a 3.1 percent gain in the shares of
Google Inc (GOOG.O), which also announced better-than-expected
third quarter profit and revenue on Thursday [ID:nN14269544].
(Additional reporting by Yinka Adegoke and Clare Baldwin;
Editing by Paul Thomasch, Gary Hill, Matthew Lewis and Carol
Bishopric)