Updated from 7:29 a.m. EST A big earnings beat cut no ice at IBM ( IBM) Friday, as shares sank nearly 5% despite a strong fourth-quarter performance in software. Software demonstrated its fastest revenue growth rate in five years, CFO Mark Loughridge said on a conference call with financial analysts, with sales totaling $5.65 billion, growing 14% (11% at constant currency) from the same period last year. As a whole, software was the largest contributor to profit, at about 40% of segment pretax earnings, he said. IBM made 11 software acquisitions in 2006, including MRO Software, FileNet and Webify. "Our focus on building up our software capabilities is clearly paying off," Loughridge said. But on Friday, shares fell $4.51 to $94.94, even as Citigroup boosted its price target on the stock to $115 from $105. The company's "key-branded" middleware segment -- such as WebSphere, Tivoli and Lotus -- continued to shine, with 25% growth (21% at constant currency), about double the market growth rate, Loughridge said. "Looking in to the future, we think (software) is particularly well-poised to enhance the bottom line," says Kim Caughey, an investment analyst with Fort Pitt Capital Group which holds IBM shares. Big Blue earned $3.54 billion, or $2.31 a share, for the fourth quarter, compared with $3.19 billion, or $1.99 a share, a year earlier. On a continuing operations basis, the company earned $2.26 a share, which includes a 6-cent-a-share tax benefit. Excluding the benefit, IBM earned $2.20 a share, beating Thomson Financial analyst estimates of $2.19 a share. IBM's revenue for the three-month period totaled $26.3 billion, compared with $24.4 billion for the fourth quarter a year ago. Analysts polled by Thomson Financial had forecast revenue of $25.66 billion. IBM global services revenue hit $12.77 billion, rising from $12 billion in the same quarter 2005. Short-term signings were $6.2 billion, rising 16% year over year, and longer-term signings totaled $11.6 billion, up 89%. IBM signed long-term deals with the states of Indiana and Texas as well as the German army. "We were very happy to see that these short- and long-term services bookings numbers were way up in the quarter," Caughey says. In particular, short-term signings are a good indicator of future business. But she was unhappy with the hardware segment in general. Hardware revenue grew to $7.19 billion from $6.9 billion. System Z and System P servers each grew market share, IBM said, while blades were flat year-to-year. System I servers lost share. Microelectronics had a difficult quarterly comparison, IBM said, and revenue in that division fell 6%. The company met demand for games processors for the Sony ( SNE) Playstation 3, Nintendo ( NTDOY) Wii and Microsoft ( MSFT) Xbox 360. "Microelectronics -- that's an area that has been a disappointment to us for a long time, and it continues to be," Caughey says. She'd like to know why the company holds on to the segment and would be pleased to see IBM sell it off. "The margins (in microelectronics) are never quite up to where they should be," she says. Looking ahead, IBM said analysts should assume a 10% growth rate for earnings for the full 2007 year, which would equal $6.67 a share. The consensus is $6.60 a share for 2007. "IBM had a terrific quarter and a good year with record cash performance, profit and EPS, as well as record payouts to shareholders," Samuel Palmisano, IBM chairman, president and chief executive officer, said in a statement. "We are well-positioned in the growth areas of a changing IT industry, focused on our evolving business model, and poised for long-term success for our clients and shareholders."