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UPDATE 3-IBM 3rd-quarter earnings rise;profit margin narrows

(Adds CFO comment, details)

SAN FRANCISCO, Oct 16 (Reuters) - IBM IBM.N posted a 6 percent rise in quarterly profit on Tuesday on strength in its services and software businesses, but profit margins narrowed and hardware sales fell.

Its shares dropped about 1 percent as the report, in line with Wall Street targets, also showed IBM’s revenue gain largely due to a weak dollar.

Chief Financial Officer Mark Loughridge told analysts the company experienced a slowdown with financial services customers in September, but that analysts’ fourth-quarter target of 15 percent earnings per share growth was ‘reasonable.’

Third-quarter net income rose to $2.36 billion, or $1.68 per share, from $2.22 billion, or $1.45 per share, a year earlier. Revenue increased 7 percent, to $24.1 billion from $22.6 billion, but rose 3 percent excluding currency-related gains.

The per-share profit and revenue results matched analysts’ average expectations, according to Reuters Estimates.

The gross profit margin in the third quarter narrowed to 41.3 percent from 42.0 percent a year earlier, due primarily to slips in software and global financing division margins.

“I think that overall (services) is certainly going to be the highlight of the quarter as an upside surprise,” said

Bob Djurdjevic, president of Annex Research. “The downside surprise was a sharp drop in the mainframe revenues and shipments.”

The company’s shares fell to $118.21 in extended trading following the earnings report after closing up 1.3 percent at $119.60 on the New York Stock Exchange.

International Business Machines Corp has improved year-over-year profitability over the last 12 consecutive quarters, as it spent more than $5 billion in 2006 on acquisitions, mainly for software companies, to expand its most profitable business.

IBM has been selling more software in its services segment, which accounts for more than one-half of revenue, as well as cutting jobs.

Revenue in IBM’s global services division rose 14 percent and the company signed services contracts totaling $11.8 billion, up 12 percent from a year earlier.

Revenue from the software business rose 7 percent to $4.7 billion. The systems and technology business, which includes server computers, data storage gear and microchips, had revenue of $4.9 billion, down 10 percent from a year earlier.

American Technology Research analyst Shaw Wu said the earnings per share “were not outstanding.”

“Some people were expecting better, including us at $1.70, but results were still in line,” he said.

Analysts expect adjusted earnings to rise to $2.61 per share from $2.26 in the fourth quarter, according to Reuters Estimates.

IBM shares, up 21 percent so far this year, trade at 16.9 times expected 2007 earnings per share, compared with a multiple of 17.9 for Hewlett-Packard Co HPQ.N and 20.6 for Dell Inc DELL.O. (Additional reporting by Jim Finkle in Boston; editing by Jeffrey Benkoe/Andre Grenon)