updated 4/18/2006 6:23:05 PM ET 2006-04-18T22:23:05

The residual effects of sweeping cost cuts helped boost International Business Machines Corp.’s first-quarter earnings by 22 percent as the technology company beat analysts’ expectations Tuesday despite minor revenue growth.

In the first three months of the year, IBM earned $1.71 billion, or $1.08 per share, on revenue of $20.7 billion. Wall Street’s consensus estimates were for earnings of $1.05 a share and $20.7 billion in revenue, according to Thomson Financial.

In the same period of 2005, IBM’s net income was $1.40 billion, or 84 cents per share, with revenue of $22.9 billion. But those results included IBM’s personal-computer division, since sold to Lenovo Group Ltd.

Excluding PC sales, IBM would have posted a profit last year of $1.37 billion, or 82 cents per share, and revenue of $20.6 billion.

While that means this quarter saw virtually no change in revenue, Armonk, N.Y.-based IBM said it would have grown 4 percent if not for currency fluctuations.

In a statement, Chairman and Chief Executive Sam Palmisano praised the results and said they reflected “the benefits of the strategic actions we’ve taken in recent years to reposition the company.”

The report was released after IBM shares gained $1.67, 2.1 percent, to close at $83.31 on the New York Stock Exchange. After hours, the stock was trading at $84.50.

The earnings report comes amid questions over the health of IBM’s technology services business, which provides more than half of Big Blue’s revenue.

With increased competition from less-expensive providers around the world, IBM’s services growth has been sluggish in recent quarters. Profit gains have been achieved largely through expense cuts and shifts in labor from costlier markets such as Europe to places like India.

In the first quarter of 2006, the services division showed a 1 percent drop in revenue, though IBM said it would have been a 3 percent gain without currency fluctuations.

The group landed $11.4 billion in services contracts in the quarter, up from $10.0 billion a year ago. While these signings will not be realized as revenue until future periods, the statistic is considered a leading indicator of IBM’s services strength.

Citing that and an improvement in the unit’s gross profit margin of 2.3 percentage points, to 26.6 percent, Chief Financial Officer Mark Loughridge said, “We’re beginning to see the expected turnaround in our services business.”

In IBM’s two other major divisions, hardware and software revenue each rose 6 percent if the sold-off PC business and currency changes are not considered. IBM’s best hardware results came in some of its lowest-margin segments, including microchips and lower-end servers.

Overall, Loughridge said IBM was on track to meet analysts’ expectations for the year. According to Thomson Financial, the consensus full-year forecast is for $5.81 in earnings per share and revenue of $90.6 billion.

“The way I would characterize what I saw today is, they’re on a slow path of improvement,” said Annex Research analyst Bob Djurdjevic. “It’s not a sprint.”

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