Net income climbed to $2.36 billion, or $1.68 a share, from $2.22bn, or $1.45, a year earlier, Armonk, New York-based IBM said today in a statement. Sales rose 6.6 percent to $24.1bn, matching the average of estimates compiled by Bloomberg.

IBM won contracts with Bank of Nova Scotia and Canadian Pacific Railway Ltd. in the quarter, increasing revenue from services 14 percent, more than quadruple the pace a year earlier. That compensated for an unexpected drop in revenue from hardware as IBM failed to get clients to buy some of its newer products.

"The services business offset much weaker than expected results in hardware," Deutsche Bank Securities' Christopher Whitmore said in an interview. The San Francisco-based analyst rates the shares "buy."

Hardware sales fell 10 percent to $4.9bn, missing Whitmore's estimate for little change in sales. Microelectronics sales dropped 15 percent from a year earlier, when orders from Microsoft Corp. for video-game chips bolstered the unit.

IBM shares fell $2, or 1.7 percent, to $117.60 in extended trading after closing at $119.60 on the New York Stock Exchange. They have advanced 23 percent this year.

In May, IBM introduced servers with the Power6 processor, a chip that helps users cut energy use or speed up processing power. Moving to a new line affected server sales, IBM said.

CEO Sam Palmisano has shed hardware businesses such as the personal-computer and printing units to focus on more profitable divisions, including services.

Total sales in the services unit climbed to $13.7bn, beating the $12.9bn estimate of Cowen & Co. analyst Louis Miscioscia. In last year's quarter they rose 2.7 percent. IBM said the growth was the fastest since 2003.

Analysts on average estimated that profit would rise to $1.68 a share, according to a Bloomberg survey.

In July, IBM signed a $1.4bn contract with AstraZeneca Plc to manage data storage, desktop computers and help desks in 60 countries, as well as a five-year deal with Canadian Pacific.

The company also won a C$480 million contract renewal with Scotiabank, Canada's second-biggest lender, to manage data centers and automated teller machines.

The contract includes the purchase of software licenses and equipment, according to Scotiabank Chief Technology Officer J Savage.

Software revenue advanced 6.5 percent to $4.7bn, trailing New York-based Miscioscia's prediction of $4.87bn.

IBM has spent about $10bn on acquisitions since 2001 to bolster that unit, according to data compiled by Bloomberg.

The profitability of the software unit also was "a fly in the ointment" this quarter, Dinosaur Securities Inc. analyst David Garrity said in an interview from New York.

Gross margin, or the percentage of sales minus the cost of goods sold, narrowed more than one percentage point from a year earlier, to 84.2 percent.