SAN FRANCISCO -- IBM's ( IBM) hardware division suffered a setback in the third quarter, the company said Thursday.

When it preannounced earnings on Oct. 8, Big Blue's revealed that its top line came up short of analysts' expectations, while beating the Street's earnings estimate. The company earned $2.05 a share, up 22% year over year, on revenue of $25.3 billion in the quarter. Analysts had been expecting EPS of $2.01 on revenue of $26.5 billion.

The shortfall came in the Systems and Technology Group, where revenue fell 9.5% year over year to $4.4 billion. The group's revenue is based on sales of hardware systems, such as x86 servers and mainframes.

Server competitor Dell ( DELL) warned of a decline in PC demand in the first half of September.

IBM's software group had the best quarter overall, at 11.8% growth year over year to $5.2 billion. The group benefits from sales of mainframes with follow-on sales of database software and middleware.

The services business lines, which includes consulting, technology integration and outsourcing, grew 7.9% year over year to $14.8 billion.

Services contract signings of $12.7 billion was 4% lower year over year, while short-term services signings rose 13%, reflecting a shift in corporate spending patterns to covering only immediate business needs.

Net income rose 20% to $2.8 billion, from $2.4 billion, or $1.68 a share, in the year ago period.

Gross margin rose to 43.3% from 41.3% for the same quarter of last year.

The company spent $2.7 billion to repurchase shares on a cash basis.