IBM profit margin narrows

By Philipp Gollner

SAN FRANCISCO (Reuters) - IBM (IBM.N) posted a 6 percent rise in quarterly profit on Tuesday on strength in its services and software businesses, but profit margins narrowed and hardware sales fell.

Its shares dropped about 1 percent as the report, in line with Wall Street targets, also showed IBM's revenue gain largely due to a weak dollar.

Chief Financial Officer Mark Loughridge told analysts the company experienced a slowdown with financial services customers in September, but that analysts' fourth-quarter target of 15 percent earnings per share growth was 'reasonable.'

Third-quarter net income rose to $2.36 billion (1.2 billion pounds), or $1.68 per share, from $2.22 billion, or $1.45 per share, a year earlier. Revenue increased 7 percent, to $24.1 billion from $22.6 billion, but rose 3 percent excluding currency-related gains.

The per-share profit and revenue results matched analysts' average expectations, according to Reuters Estimates.

The gross profit margin in the third quarter narrowed to 41.3 percent from 42.0 percent a year earlier, due primarily to slips in software and global financing division margins.

"I think that overall (services) is certainly going to be the highlight of the quarter as an upside surprise," said

Bob Djurdjevic, president of Annex Research. "The downside surprise was a sharp drop in the mainframe revenues and shipments."