Although the results were mixed, investors bid shares up by $1.65, or 2%, to $84.24 in recent after-hours trading. The stock closed the regular session up 24 cents to $82.59.

IBM posted third-quarter earnings of $1.52 billion, or 94 cents a share, on sales of $21.53 billion. During the same quarter last year, the company earned $1.55 billion, or 92 cents a share, on sales of $23.35 billion.

The company's results for the quarter included a one-time charge this year of 32 cents a share for a "homeland" repatriation tax as well as a litigation charge last year of 11 cents a share last year. Excluding those one-time items, IBM earned $1.26 a share in the third quarter, compared with $1.03 a share in the same period a year ago.

IBM's bottom line easily beat analyst estimates of $1.13 a share excluding items, as gathered by Thomson First Call. But sales fell short of the $21.71 billion that Wall Street targeted, by more than $100 million.

Excluding 2004 revenue from IBM's PC business, which the company sold May 1, third-quarter revenue increased a modest 4% from the same period a year ago.

"The top line was disappointing, especially on the services side," said Dan Niles, CEO of Neuberger Berman Technology Management, an investment management firm that doesn't hold shares of IBM. But "the margins are definitely encouraging," he added.

Overall gross margin was 40.6% in the third quarter, up from 36.5% in the third quarter last year and 39.4% in the previous quarter. Excluding the PC unit, gross margin was 40.0% in the third quarter last year.

Big Blue's services unit, which made up 54% of total sales, posted a 3.3% increase in revenue from a year ago to $11.69 billion. The unit, which suffered a major slowdown in the first quarter and then rebounded in the second quarter, marked its second consecutive quarter of increasing contract bookings, to $11 billion from $9.8 billion last year.