Updated from 10:43 a.m. EDT

IBM ( IBM) shares lost some groundFriday, as the level of new business in Big Blue's massiveservices arm underscored that a real upturn inenterprise spending is not yet under way. Investors were also disappointed by a bigger-than-expectedloss in the company's semiconductor arm.

IBM's stock was recently off $2, or 2.1%, to $92.

But IBM also delivered an upside surprise onfirst-quarter sales and in-line earnings in anafter-the-bell report.

At Goldman Sachs, analyst Laura Conigliaro summedup the quarter as unexciting. "IBM's in-line March quarter was not the definitive statement we would have preferred, although, on balance, it was also not much different from many other tech companies with revenue alittle higher and earnings in line," she wrote. Conigliaronoted that IBM also offered the now-familiarcommentary that rising corporate profits shouldstimulate more technology buying.

"In short, investors will probably have to wait until the June quarter is well under way before getting a real sense of upside potential. That said, IBM's organic growth is beginning to look a little healthier and should improve further during the year," she said. IBM's real revenue growth (at constant currency) of 2.9% was"higher than we had expected (0.8%), driven primarilyby hardware and software," she noted.

In fact, the currency benefits of a weak dollarthat have helped IBM so much over the past year or sowill be a little less evident in the June quarter,when currency should contribute about 400 basis points(down from the March quarter's 750 basis points). ButConigliaro thinks that with enterprise spendingimproving and continued share gains by Big Blue, IBMcould show signs of potential top- and bottom-lineupside by the end of the June quarter. (Goldman hasn'tdone recent banking for IBM.)

"I do expect IBM to do better later in the year simply because they're so large and economically exposed" -- and the economy is in rebound mode, said Michael Holland, manager of the Holland Balanced fund, which owns IBM shares. "I expect better results relative to expectations as the year goes on."

"We see the breadth of IBM's product and servicesofferings and IBM's on-demand initiative as cleardifferentiators for enough momentum in 2004 to evenoffset unfavorable currency direction," i.e., if the dollar strengthens, wrote CIBC analyst Ali Irani,who kept his revenue and earnings estimates unchanged.His firm has done investment banking for IBM.

Other analysts likewise cast the quarter as onethat was largely in line with expectations and madeonly minor tweaks in their estimates.

At First Albany, Joel Wagonfeld pushed up his 2004revenue estimate to $95.6 billion from $95.0 billionand pushed up EPS to $4.93 to $4.89. He noted few netsurprises in IBM's March quarter. For example, thoughnew services bookings of $10.5 billion were at the lowend of his expectations (for $10 billion to $12billion), he noted that services revenue was a littlebetter than he'd forecast, helped by strategicoutsourcing and maintenance. First Albany hasn't donebanking for IBM.

Sales from continuing operations in the first quarter were $22.2 billion, up 11% from last year's levels and slightly above Wall Street expectations for $21.91 billion. Currency benefits contributed 7.5 percentage points of IBM's sales gain.

Gross profit margin of 36% was identical with last year's levels.

Net income totaled $1.6 billion, or 93 cents a share, in line with expectations.

The company said it had signed services contracts of $10.5 billion, in constant currency, or $11.2 billion at spot rates. Many analysts had geared for bookings of around $11 billion.

In a prepared statement, CEO Sam Palmisano said the company had "entered the first quarter with good momentum," adding, "We remain enthusiastic about our prospects for 2004."

On a postclose conference call, CFO John Joyce said first-quarter growth in the company's hardware and software lines affirm his view -- first voiced in January -- that tech spending would improve this year. "Customers' existing infrastructure is the oldest it's been in nearly 20 years. There's a need for customers to update," he said.

Not only do corporate operating budgets appear likely to be headed up, Joyce said, but also many potential customers are now benefiting from lower depreciation after several years of minimal spending, which could make it easier for them to begin purchasing new technology again.

Many on Wall Street anticipate that Big Blue will see more upside later this year or in 2005, assuming that corporate profits stay strong and big companies become more willing to invest in information technology.

By business line, revenue from IBM's flagship global services arm was up 9% to $11.1 billion (or 1% after adjusting for currency benefits from a weak dollar), while hardware was up 16% to $6.7 billion (10% after currency adjustments).

IBM said its semiconductor arm lost about $150 million, well above the $50 million loss projected by many analysts. It expects the division to break even or be profitable for the full year 2004, however, assuming that it can improve subpar yields in its 300-millimeter wafer fabrication plant, hold income from intellectual property flat and see demand continue to rise.

IBM's software sales rose 11% to $3.5 billion (3% after currency adjustments).

Also after the bell, IBM endorsed full-year consensus estimates, which call for the company to earn $4.93 per share and post $95.663 billion in revenue.

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