updated 7/18/2006 5:52:01 PM ET 2006-07-18T21:52:01

International Business Machines Corp.'s second-quarter profit rose nearly 11 percent, slightly exceeding analysts' forecasts despite another period of lackluster revenue growth.

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From April through June, IBM earned $2.02 billion, $1.30 per share, on revenue of $21.9 billion, the company said Tuesday.

The consensus analyst estimate had been for earnings of $1.29 per share on revenue of $21.9 billion, according to Thomson Financial.

In the same period last year, IBM showed earnings of $1.83 billion, or $1.12 per share, with revenue of $22.3 billion. However, that quarter included one month of sales in IBM's personal-computer business, before the group's sale to Lenovo Group Ltd.

Excluding PCs, the second quarter last year saw earnings of $1.85 billion, or $1.14 per share, and revenue of $21.7 billion.

On that basis, IBM saw just a 1 percent revenue increase in the second quarter. Weak sales growth has plagued Big Blue for several quarters, forcing the company to use cost cuts to improve profits and stock buybacks to further boost earnings per share.

But investors have been especially unimpressed with IBM's prospects of late, dragging the stock to 52-week lows. Several analysts were expecting Tuesday's report to reveal little or no growth in contract signings in IBM's services division and so-so sales of server computers.

Indeed, Chief Financial Officer Mark Loughridge said the services and hardware divisions “didn’t perform to our expectation.”

The services arm signed a relatively low $9.6 billion in new contracts last quarter. Almost all of that revenue will not be counted until future periods, however. In the quarter itself, services revenue dropped 1 percent to $11.9 billion.

IBM contends that an increased priority on profitability rather than sheer deal size makes today’s services deals more valuable than contracts of a few years ago. Reflecting that, the division’s gross profit margin — revenue minus cost of goods sold — rose 1.6 percentage points to 27.7 percent.

Even so, Loughridge acknowledged disappointment in contract signings. He also said efforts to improve the profitability of technology-integration services are “taking longer than anticipated.”

“Clearly there’s enough opportunity,” he said of the services division overall. “We just need to get it signed.”

Indeed, the report showed that the services division signed a relatively low $9.6 billion in new contracts last quarter. Almost all of that revenue will not be counted until future periods, however. In the quarter itself, services revenue dropped 1 percent to $11.9 billion.

Excluding the PC business from the comparison figures, hardware revenue rose 3 percent to $5.1 billion. Mainframe sales helped lead the performance with a 7 percent jump; lower-priced Unix and Intel-based servers declined.

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