updated 10/16/2007 5:05:32 PM ET 2007-10-16T21:05:32

Strength in services and software overcame a slide in hardware and helped third-quarter earnings rise 6 percent at International Business Machines Corp., enough to beat Wall Street expectations Tuesday.

From July through September, IBM earned $2.36 billion, $1.68 per share, surpassing the profit of $2.22 billion and $1.45 per share that the Armonk, N.Y.-based technology company posted in the same quarter of 2006.

Earnings per share rose at a much steeper rate than net profit because IBM’s aggressive stock buyback plan has taken 130 million shares out of circulation in the past 12 months.

Revenue in the third quarter rose 7 percent to $24.1 billion from $22.6 billion a year ago.

Analysts’ consensus forecast was for earnings of $1.67 per share on a shade under $24.1 billion in revenue, according to Thomson Financial.

IBM shares gained $1.57, 1.3 percent, to close at $119.60 before the earnings report was released. In extended trading, the stock initially fell to $118.

IBM has been following a steady formula, generally using stock repurchases and expense reductions to increase earnings per share by double-digit percentages even with revenue growth in the single digits. This time, however, IBM’s gross profit margin declined to 41.3 percent from 42.0 percent in the same period of 2006.

The company’s revenue growth also has been greatly aided by weakness in the dollar, which makes deals with IBM cheaper for overseas buyers. If not for currency fluctuations, this quarter’s rise in revenue would have been 3 percent.

One of the most closely watched indicators for IBM’s business is services contract signings, which represents revenue that will be booked over the course of future quarters. IBM signed $11.8 billion in services contracts in the third quarter, up from $10.5 billion a year ago. Some analysts had worried that recent problems in credit markets would hurt IBM’s services signings, because the financial services industry is IBM’s largest customer segment.

Revenue actually booked in the third quarter from technology services rose 14 percent to $13.6 billion. The gain would have been 10 percent if not for the weak dollar.

Hardware revenue fell 10 percent to $4.9 billion, but that would have been 13 percent without the benefit of currency fluctuations.

Part of the decline could be attributed to IBM’s recent sell-off of its printing division, but even so, other key segments showed declines. Mainframe revenue — a vital category for IBM — was down 31 percent. One big server line saw a 21 percent drop and chip sales were off 15 percent.

In a statement, IBM’s chairman and CEO, Sam Palmisano, called the services results “outstanding” but acknowledged that IBM has to “work through a transition in our hardware business.”

Software, IBM’s most profitable segment, grew its revenue 7 percent to $4.7 billion. The increase would have been 3 percent without the shifts in the dollar.

In the first nine months of the year, IBM earned $6.47 billion, or $4.42 per share, with revenue of $69.9 billion. Those numbers all rose from the first three quarters of 2007, when IBM made $5.95 billion, or $3.81 per share, on revenue of $65.2 billion.

In a conference call with analysts, Chief Financial Officer Mark Loughridge said the company remains “on track for the full year.” In its last quarterly report, IBM predicted that earnings per share would rise 14 percent to 15 percent in 2007.

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