updated 1/17/2006 6:05:42 PM ET 2006-01-17T23:05:42

A new line of mainframe computers and positive trends in the chip business boosted fourth-quarter results at International Business Machines Corp., where net profits rose 13 percent and beat Wall Street expectations Tuesday.

The report also provided a crucial update on the health of IBM’s services business, which accounts for more than half of Big Blue’s revenue. IBM saw a shortfall in long-term services contracts signed in the fourth quarter, though it was not as severe as some analysts had feared.

In the last three months of 2005, IBM earned $3.19 billion, or $1.99 per share, on revenue of $24.4 billion. The results were pulled down 10 cents per share by a $267 million charge stemming from IBM’s recent decision to freeze its pension plan for U.S. workers in 2008, and by 2 cents per share because of an accounting change.

Leaving those figures out, the $2.11 in earnings per share easily beat the $1.94 consensus of analysts surveyed by Thomson Financial. However, IBM fell short of the revenue forecast of $25.5 billion.

In the same period of 2004, IBM registered a net profit of $2.83 billion, $1.67 per share, with revenue of $27.7 billion. However, subtracting the performance of IBM’s personal-computer division, which was later sold to China’s Lenovo Group Ltd., earnings would have been $2.77 billion, $1.64 per share, on $24.7 billion in revenue.

That means IBM saw a 1 percent drop in revenue in the fourth quarter, though Mark Loughridge, IBM’s chief financial officer, said the company would have seen 3 percent growth if not for currency fluctuations.

Looking ahead, Loughridge said IBM has “headwinds to work through,” including pension costs and a strengthening dollar, which can hurt U.S.-based exporters. Still, he said, Armonk, N.Y.-based IBM will likely exceed Wall Street’s current estimates of $5.66 per share in 2006 by as much as 12 cents. The revenue forecast is $93.4 billion.

IBM shares fell 17 cents to close at $83 on the New York Stock Exchange before the earnings report was released. In after-hours trading, IBM shares rose 11 cents to $83.11.

The report wrapped a bumpy year in which Big Blue’s stock fell 17 percent, leaving IBM’s market capitalization below that of Google Inc. The first quarter fell short of analysts’ forecasts, leading IBM to cut 14,500 jobs and prompting a Securities and Exchange Commission investigation into how the company disclosed its stock-compensation expenses.

While the following two quarters marked a return to form, many analysts said the fourth-quarter report would indicate whether IBM had been benefiting more from cost-cutting than from strength in its core businesses.

In particular, some analysts had warned in recent weeks that the services division had seen trouble closing deals in the fourth quarter.

The actual figure, $11.5 billion in signings, was about the midpoint of estimates but still represented a 9 percent slide from the same period a year earlier.

“You put it all together and what it tells me is they’re losing more business than they’re selling,” said analyst Bob Djurdjevic of Annex Research. “And that’s a worrisome sign.”

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