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In an apparent vindication of its strategy to move away from low-margin offerings like PCs into higher-margin areas like software and services, IBM has reported an 11% net income gain, exceeding analyst expectations, thanks to higher global services sales and burgeoning software demand. IBM shares fell 5%, however, on weak hardware sales. The company earned net income of $3.54 billion this quarter, or $2.31/share, up from $3.19 billion, or $1.99/share, a year ago. Revenue grew 7.5% to $26.4 billion, up from $24.4 billion and ahead of Street forecasts of $25.7 billion. Earnings from continuing operations were $3.5 billion, or $2.26/share, also ahead of the Street's $2.19 expectation. The global services division was a strong revenue driver, rising over 6% to $12.8 billion on new contracts with the German military, the states of Indiana and Texas, and mobile-phone company Vodafone. Software, the company's most profitable business unit, saw a 15% rise in sales to $5.7 billion. The total gross profit margin rose to 44.6% in Q4 from 44.1% a year ago. Revenue from hardware sales, the only blot on the report, ticked up to a disappointing $7.2 billion from $6.9 billion last year.

• Sources: Bloomberg, Red Herring, MarketWatch, Wall Street Journal. Conference call transcripts: Q4 2006
• Related commentary: The Decline of the PC: Computers No Longer a Growth Industry, Microsoft, Apple and IBM: Gorillas in the Living Room, Goldman On IT Trends: What Tech Companies Stand To Gain?, IBM: You Don't Need a Computer to See Its Growth Potential
• Potentially impacted stocks and ETFs: International Business Machines (NYSE:IBM). Competitors: Accenture Ltd. (NYSE:ACN), Electronic Data Systems Corp. (NASDAQ:EDS), Hewlett-Packard Co. (NYSE:HPQ), Microsoft Corp. (NASDAQ:MSFT). ETFs: Internet Architecture HOLDRs (NYSE:IAH), iShares Goldman Sachs Technology Indx (NYSEARCA:IGM), DIAMONDS Trust, Series 1 (NYSEARCA:DIA), iShares S&P Global Technology (NYSEARCA:IXN)

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Source: IBM Profit Up 11%, but Shares Drop on Hardware Sales

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