Updated from 5:09 p.m. EDT


(IBM) - Get Report

late Thursday missed its financial targets for the first quarter, due to a weak finish in its services group, and set itself up for a disappointing rest of the year as well.

Shares of Big Blue were punished in after-hours trading, recently falling $4.24, or 5%, to $80.37 after a brief halt -- their lowest level in 20 months.

The technology giant's unexpected first-quarter financial results came two business days ahead of schedule.

IBM reported net income of $1.4 billion, or 84 cents a share, on sales of $22.9 billion. During the same quarter last year, IBM earned $1.36 billion, or 81 cents a share, on sales of $22.2 billion.

Analysts had expected earnings of 90 cents a share on sales of $23.6 billion, on average, according to Thomson First Call.

IBM's miss follows two days of heavy selling in technology shares and the broader market, and looked likely to exacerbate the situation heading into Friday.

Sun Microsystems

(SUNW) - Get Report

also announced late Thursday that it, too,

missed its financial targets for its just completed quarter.

Among shares moving lower in sympathy late Thursday were


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(MSFT) - Get Report



(CSCO) - Get Report



(DELL) - Get Report


"We've just had a couple of rough weeks across the board," said CFO Mark Loughridge during a conference call. He said the first two months of the quarter were strong and all signs indicated that the situation would continue into the quarter's final month. It didn't.

Loughridge said service customers deferred more contracts than expected, sales execution and customer deferrals also hampered growth in a couple of product lines, and a storage product transition occurred later than expected.

"Overall, we could have done better this quarter, but we had two soft weeks, following several consecutive quarters of solid performance," said the CFO. "We're taking actions to address the issues and improve our overall performance."

Still, Loughridge wouldn't say whether the company was through the rough patch. "It's too early to tell if its part of a broader trend," he said.

Loughridge said that IBM had accelerated plans to shift company resources from low- to high-growth areas but that most of the benefits from these changes and cost cuts wouldn't yield until the second half of the year.

Additionally, the CFO said that the Street consensus earnings estimate for the second half of the year is "reasonable" but that the company plans to hit that goal on lower sales and increased cost savings. "We remain committed to our longer-term model to deliver double-digit earnings-per-share growth," he said.

Loughridge declined to comment about demand for the second quarter. Analysts had predicted earnings of $1.13 a share and sales of $24.9 billion for the second quarter, and earnings of $5.05 a share on sales of $102.7 billion for the year.

IBM has had a busy quarter, announcing a major storage partnership, a significant outsourcing deal, the inking of a couple of acquisitions and the debut of a new semiconductor architecture, but its stock has done nothing but slide this year. With the late-Thursday selloff, shares are down 18% this year and 12% this month.

Investors have grown increasingly concerned about where IBM's future growth is going to come from. The company is aiming at double-digit earnings growth and mid-to-high single-digit sales growth as long-term targets.

The first quarter proved tougher than expected, though.

IBM's overall sales grew just 3% and 1% when adjusted for currency effects. Its services division -- the company's largest unit -- grew sales only 6%, or 3% including currency fluctuations. It signed up $10 billion in service contracts, and its backlog was $110 billion, compared with contract signings of $12.7 billion and a backlog of $111 billion in the fourth quarter.

Hardware sales were flat, or down 2% with currency impact, from the same quarter last year. Sales of its personal systems group fell 3% to $2.27 billion, but IBM has sold that unit to China's


. That deal should close in the current quarter.

Sales of its systems and technology group totaled $3.9 billion, up 2% thanks to sales of its servers. The systems and technology group comprises IBM's mainframes, servers and storage products.

It is IBM's second-largest business group, but its growth has been lagging. However, the company has demonstrated strong momentum in servers, and it inked a significant storage deal earlier this month with

Network Appliance

. The first quarter is typically weak for technology hardware sales with most in the industry pegging their hopes on increased spending in the second half of the year.

IBM's earnings include a 4-cent-a-share impact for stock-option costs and a 10-cent-a-share impact for its pension plan. Loughridge announced the change last week. Wall Street's targets were adjusted for the options impact, as were IBM's financial results for 2004.