July 18 (Bloomberg) -- International Business Machines Corp., the world's biggest computer-services provider, may say second-quarter profit increased after more than $5 billion in acquisitions buoyed software sales.

Net income may have risen to $2.2 billion, or $1.49 a share, from $2.02 billion, or $1.30, a year earlier, according to the average of estimates in a Bloomberg survey of analysts. Sales at the Armonk, New York-based company may have advanced about 6 percent to $23.1 billion, the survey showed.

Chief Executive Officer Sam Palmisano, who spent the last four years shedding hardware units and snapping up more than 35 software makers, added programs that carry profit margins more than twice those in IBM's other divisions. He expects software to generate about half IBM's pretax profit by 2010, limiting IBM's reliance on hardware for growth.

``The software acquisition strategy is paying dividends,'' said David Grossman, a Thomas Weisel Partners LLC analyst in San Francisco. He rates the stock ``overweight.''

Since 2003, Palmisano's purchases include Telelogic AB and FileNet Corp. The acquisitions continued this week, with the purchase of Canadian application maker DataMirror Corp. IBM is the world's second-largest software maker after Microsoft Corp.

IBM reports earnings after the close of New York Stock Exchange trading today. Its shares have gained 50 percent in the past 12 months and are trading at five-year highs. They gained $1 to $111.77 at 10:03 a.m. in New York Stock Exchange composite trading.

Spokesman John Bukovinsky declined to comment. Eighteen analysts recommend buying the stock and six say hold, according to data compiled by Bloomberg.

Palmisano's Strategy

UBS analyst Benjamin Reitzes said revenue from the software unit gained 8 percent to $4.6 billion in the period. Hardware sales may have dropped 7 percent, and services revenue probably also rose 8 percent to $12.9 billion, he said.

Palmisano, 55, turned to software to counter slowing growth in hardware businesses such as storage equipment. In June, IBM sold its commercial printing unit for $725 million to Ricoh Co., Japan's second-biggest equipment maker. The shift led to six straight quarters of profit increases before today.

In the first quarter, the gross profit margin, or the percentage of sales left after production costs, for the software unit was 84 percent, compared with 40 percent for the entire business. The margin for hardware was 35 percent.

IBM agreed to acquire FileNet, a maker of programs that let workers share documents on corporate networks, last year for $1.6 billion. IBM also agreed to buy Malmoe, Sweden-based Telelogic for $743 million in June, adding software design systems used by companies including General Electric Co.

Outside North America

Much of IBM's growth is coming outside North America. The company expects sales in countries such as India, Brazil, Russia and China, which now equal about 5 percent of revenue, will double by 2010.

``All signs point to strength outside the U.S.,'' said Kim Caughey, a senior analyst at Fort Pitt Capital Group in Pittsburgh, which manages $1.2 billion and owns IBM shares. ``The company has benefited from the weak dollar, and it makes the higher-priced products and services in IT look like they're on sale.''

The U.S. dollar fell 1.3 percent against the euro in the three months ended June 30, and 1.5 percent compared with the Chinese currency.

Palmisano also has sought to lift earnings with share buybacks, announcing a plan to repurchase about 8 percent of the common stock for $12.5 billion in May. IBM raised its growth target for earnings per share to 16 percent, from 11 percent, by 2010. The CEO may need to do more than that to keep up the pace of gains, according to Cowen & Co. analyst Louis Miscioscia.

``IBM still has a lot to prove,'' said New York-based Miscioscia, who rates the stock ``neutral.'' ``It's encouraging to see the company grow earnings at a much faster pace than they have historically, but organic growth has been tepid.''

To contact the reporter on this story: Matthew R. Miller in Atlanta at mmiller31@bloomberg.net

Last Updated: July 18, 2007 10:04 EDT