updated 7/16/2004 7:34:51 PM ET 2004-07-16T23:34:51

Strong growth in computer hardware sales helped boost second-quarter profits nearly 17 percent at IBM Corp., beating Wall Street’s forecast for the technology bellwether Thursday.

From April through June, IBM earned $1.99 billion, or $1.16 per share, on revenue of $23.15 billion. In the same period last year, IBM made a net profit of $1.71 billion, or 97 cents per share, on revenue of $21.63 billion.

This time around, analysts surveyed by Thomson First Call were expecting IBM to show earnings of $1.12 per share and revenue of $23.35 billion.

IBM’s chief financial officer, Mark Loughridge, said growth in the information-technology market is the best it has been in the past four or five years, and noted that “customer spending continues to improve.” He said analysts’ current forecasts for IBM’s full-year performance “remain reasonable.”

The report was being closely examined by technology investors, who had reason for concern Tuesday when Intel Corp. lowered profit forecasts because of an unexpected buildup of inventory.

An analysis released Thursday by Smith Barney said corporate tech buyers are generally optimistic, but it also noted trouble spots for big vendors: U.S. hardware prices are getting lower and European computer sales seem to be slowing “for the first time in several quarters.”

IBM shares lost 11 cents to close at $84.02 on the New York Stock Exchange before the earnings report, down 9 percent for the year. In after-hours trading they gained 68 cents.

As in recent quarters, weakness in the dollar raised IBM’s revenue figures. Big Blue’s 7 percent growth in overall revenue would have been 4 percent without currency fluctuations.

IBM gets half of its revenue from technology services, a division that grew 7 percent to $11.33 billion in the second quarter. However, that rise would have been 2 percent without currency fluctuations. Also, services’ gross margins fell slightly in the quarter, to 25.2 percent from 25.9 percent a year earlier.

Hardware, including mainframe and server computers that traditionally have been Big Blue’s bread and butter, saw a 12 percent leap in sales (10 percent at constant currency) to $7.42 billion — and a hefty increase in gross margins, to 29.2 percent from 26.9 percent.

Those divisions counteracted a flat performance in software, which pulled in $3.49 billion in revenue in the quarter. Without currency adjustments, software revenue would have dropped 4 percent.

In the first half of 2004, IBM earned $3.59 billion, $2.08 per share, and posted revenue of $45.40 billion. Each figure rose from the first half of 2003, when IBM showed profits of $3.09 billion, $1.75 per share, on revenue of $41.70 billion.

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