| NEW YORK
NEW YORK IBM 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 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, which also announced better-than-expected third quarter profit and revenue on Thursday.
(Additional reporting by Yinka Adegoke and Clare Baldwin; Editing by Paul Thomasch, Gary Hill, Matthew Lewis and Carol Bishopric)