David Grossman, an analyst with Thomas Weisel, said that based on the signs of improvement in the quarter, "if we get a recovering economy" revenue should pick up next year when IBM will start selling a new mainframe and its backlog of services contracts will kick in.

IBM's sales decline was due in part to the relative strength of the U.S. dollar, which depresses results from overseas sales. IBM said revenue would have been down 5% without the effect of currency conversions.

IBM earnings once were viewed as a proxy for the computer industry and overall capital spending. But IBM's ability to wrest growing profits from declining sales is highly unusual.

Rising spending on computer infrastructure in developing nations is helping IBM, which has won contracts to help build rail systems in China, wireless phone systems in India and a water utility in Malta.

IBM's biggest revenue decline came in hardware. IBM no longer makes PCs, but it is sensitive to cautious buying by corporate chief-information officers. Sales of IBM's highly profitable mainframes fell 26% from last year.

Last week, a small competitor revealed that the Justice Department had asked it for information about potentially anticompetitive actions in the mainframe market, which IBM dominates. IBM has said it hasn't done anything illegal.

Source:Wall Street