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Big Blue delivers on strong sales growth

IBM (NYSE: IBM) beat Wall Street estimates Monday with second quarter earnings of 91 cents a share excluding one-time gains on sales of $21.9 billion.

Sales growth in the quarter was up 16 percent from a year ago. Wall Street was expecting earnings of 88 cents a share, according to First Call Corp.

Including one-time gains, International Business Machines Corp. reported earnings of $2.4 billion, or $1.28 a share, compared with $1.5 billion, or 75 cents a share, in the second quarter a year ago.

The second quarter net income results include an after-tax benefit of approximately $700 million, 37 cents a share. IBM closed the sale of the company's Global Network in the United States, Japan, the United Kingdom and Ireland. IBM also converted DRAM plants to focus on logic chips and took a charge while making other semiconductor restructuring moves. Big Blue also restructured its storage business and implemented an accounting change to shorten the depreciable lives of personal computers used within the company to three years from five years.

IBM didn't wow Wall Street like it did in the first quarter, but don't blame Big Blue. Analysts increased their expectations following IBM's first quarter results, which beat estimates by 13 cents a share.

IBM's second quarter sales slightly above Wall Street projections, which called for sales north of $20 billion. The company's gross profit margin was 37.5 percent in the second quarter compared with 38 percent a year ago.

It was a business-as-usual quarter for IBM, which means services led the charge.

"Our services business continued to show excellent results in the quarter," said Louis V. Gerstner, Jr., IBM chief, in a statement. "Our software unit once again turned in a very good performance, with particularly strong results from our database, transaction processing and Tivoli products."

Services sales, including maintenance, jumped 15 percent to $8 billion in the quarter. Excluding maintenance, services sales jumped 19 percent to $6.7 billion. Due to a $9.5 billion in new services contracts, IBM had a services backlog of $55.2 billion. Software revenue increased 9 percent from a year ago.

The company's hardware business, expected to be IBM's weak spot, saw "good growth."

Hardware sales were $9.4 billion in the second quarter, up 22 percent compared to a year ago. Personal computer, RS/6000 and System/390 server revenue increased, but AS/400 revenues declined. Overall storage and microelectronics revenues grew in the quarter, the company said.

IBM spent about $1.6 billion in share buybacks in the quarter.

On a conference call, IBM financial chief Doug Maine said it was premature to discuss the second half outlook given the breadth of Big Blue's business.