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International Business Machines Corp.'s (IBM) third-quarter profit jumped 14% as better margins more than offset lower revenue.

While the tech giant again lifted its full-year profit target as results topped analysts' estimates, shares fell 3.7% after-hours to $123.11. The stock is up by about half this year.

IBM now sees 2009 earnings of at least $9.85 a share, up 15 cents. Wall Street most recently expected earnings of $9.78. IBM continued to see earnings "ahead of pace" for its 2010 outlook of $10 to $11 a share.

For the fourth quarter, Chief Financial Officer Mark Loughridge said the company expected to post revenue growth. The mean estimate of analysts surveyed by Thomson Reuters was a 1% drop to $26.79 billion. Chairman and Chief Executive Samuel J. Palmisano added IBM saw improved revenue trends, while notching share gains in software and hardware.

The tech bellwether's shift in focus to software and its giant services business on advising government agencies and companies on their fundamental operations, and away from hardware, has paid off.

Tech demand has held up well for much of the recession, and a number of companies have said they see business improving in the second half of the year.

Big Blue reported earnings of $3.21 billion, or $2.40 a share, up from $2.82 billion, or $2.04 a share, a year earlier. Revenue declined 6.9% to $23.6 billion, two percentage points of which was due to currency changes.

Analysts polled by Thomson Reuters expected per-share earnings of $2.38 on revenue of $23.4 billion.

Gross margin jumped to 45.1% from 43.3%, led by improved margins in services and software.

Revenue in the Americas, IBM's biggest market, fell 5%, falling 4% excluding currency fluctuations. Sales in its Europe and Middle Eastern region declined 12% but was essentially flat in Asia.

Total global services revenue decreased 7%, as global technology services fell 4.4% to $9.4 billion, or 2% excluding currency fluctuations, while global business services dropped 11% to $4.3 billion. Revenue from the software segment were down 3%, or flat when adjusted for currency.

IBM's services contracts declined 7% to $11.8 billion. In addition, IBM said it signed three deals in the first two days of October with a total value of about $1 billion.

On Tuesday, another tech bellwether, computer-chip maker Intel Corp. (INTC) provided more evidence that the tech sector recovery will continue through the holiday shopping season as the company gave a strong view for the rest of the year, even as third-quarter profits slid 7.8%.

-By John Kell, Dow Jones Newswires; 212-416-2480; john.kell@dowjones.com