Oct. 16 (Bloomberg) -- International Business Machines Corp., the biggest computer-services company, said third-quarter profit rose 6.3 percent on new contracts and software sales.

Net income climbed to $2.36 billion, or $1.68 a share, from $2.22 billion, or $1.45, a year earlier, Armonk, New York-based IBM said today in a statement. Sales rose 6.6 percent to $24.1 billion, 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. ``Some large deals were deferred and big U.S. financial customers appear to have pulled back financial spending.'' The San Francisco-based analyst rates the shares ``buy.''

Hardware sales fell 10 percent to $4.9 billion, 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 dropped $1.35, or 1.1 percent, to $118.25 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. U.S. banks and brokerages failed to spend as much as IBM expected, Chief Financial Officer Mark Loughridge said.

Palmisano's Strategy

``Our hardware business didn't meet our expectations,'' Loughridge said on a conference call. Mainframe revenue declined 31 percent, while System I server sales slumped 21 percent.

Loughridge said hardware revenue may be little changed in the fourth quarter from a year earlier, while software will record ``double-digit'' growth in revenue and profits.

Chief Executive Officer 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 $13.7 billion, beating the $12.9 billion 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.

Revenue from consulting and outsourcing will grow more in the fourth quarter, Loughridge said.

``These are very large cruisers,'' he said. ``Once you get that momentum going, you're not going to change it much.''

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

Strength in Services

In July, IBM signed a $1.4 billion 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.P. Savage.

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

IBM has spent about $10 billion 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 1 percentage point from a year earlier, to 84.2 percent.

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

Last Updated: October 16, 2007 18:54 EDT