NEW YORK (CNNMoney.com) -- IBM Tuesday reported second quarter-earnings that topped Wall Street forecasts by a penny a share and sales that were in line with estimates, but the company posted weaker than expected services bookings, a closely watched indicator of the company's performance.

The world's largest computer company said net earnings rose 10.5 percent to $2 billion, or $1.30 a share, topping average Wall Street forecasts of $1.29. That's in part thanks to cost savings from restructuring moves as well as the sale a year ago of IBM's unprofitable PC business, which it sold to Lenovo.

Sales were $21.9 billion, down 2 percent from a year ago but up 1 percent when adjusted for the impact of the divested PC business.

IBM (Charts) stock jumped more than 2 percent in after-hours trading on the news after climbing 0.7 percent in regular trading, but was still not far from its 52-week low of $73.20.

"I thought it was pretty good," said Roger Kay, president of technology consulting firm Endpoint Technology Associates, of the quarter. "They are getting rid of the low-margin stuff, like PCs and displays, and are moving into higher-end businesses. If they keep moving into higher-margin businesses as well as cost cutting, they can continue to get earnings growth for the next little while."

"While some areas of our business did well, others leave room for improvement," said IBM's CFO Mark Loughridge in a conference call with analysts. "In servers, execution issues in our supply chain left some orders unfulfilled. In services, our short term signings were weak."

IBM's global services division, its largest division, reported sales of $11.9 billion, a 1 percent decline from a year ago when adjusted for currency fluctuations. IBM signed services contracts totaling $9.6 billion for the quarter, down 34 percent from the year-ago quarter's $14.6 billion. IBM ended the quarter with an estimated services backlog of $109 billion.

Loughridge pointed out that last year's services bookings number for the second quarter was its highest quarterly number in years, making for a tough comparison for the second quarter of this year, but he acknowledged that performance fell short of expectations.

On the conference call, analysts focused on the weak bookings number, asking Loughridge whether the shortfall would mean that IBM's total bookings for the year will fall short of expectations.

"Our first job is get the signings growth back on track next quarter and we feel confident we will see growth next quarter," Loughridge said.

Loughridge said he expects IBM to post earnings per share growth in line with current analysts' estimates of 10 percent, or $5.86 per share, for 2006.

But Peter Misek, senior technology analyst at Canaccord Adams, said that if the slowdown in corporate tech spending that IBM saw in June continues, it will be hard for the company to meet that number.

"We were surprised they didn't guide lower based on the quarter they put up with the bookings number," said Misek, who downgraded the stock to "hold" in June based on the June spending slowdown.

In a note to clients published last week, UBS analyst Benjamin Reitzes predicted that services bookings would fall near the $10 billion range, lower than his original forecast of $12 billion to $13 billion.

"It takes a large number of big deals to move the needle at IBM -- and given the inconsistencies over the last couple years in terms of bookings, we believe mid- to low-single digit growth is more appropriate over the long term," Reitzes wrote.

Despite solid earnings growth and higher profitability, analysts and investors have expressed concern with IBM's ability to grow revenue, which is expected to come in at $90.2 billion this year.

That's less than Hewlett-Packard's expected revenue of $91 billion, which would make HP the number one computing company in terms of total revenue for the first time. It's also a decline of 1 percent for 2006 and an increase of just 4 percent for 2007.

IBM chairman and chief executive Sam Palmisano has implemented several cost-cutting moves that have improved profits, slashing 13,000 jobs last year and reorganizing the company's services division.

Palmisano also announced last month that the company will triple its investment in India, where sales are growing at a much faster rate than IBM's sales overall, to $6 billion over the next three years.

Despite these moves, shares of IBM are down 10 percent for the year.

"The Street is pretty picky on them," said Endpoint's Kay. "These guys grew earnings 11 percent. For me, that's pretty good."

IBM's hardware revenues fell 7 percent to $5.1 billion from $5.6 billion a year earlier, which included revenues from the PC business. Excluding that business, hardware revenues increased 3 percent, the company said. Revenues from its microelectronics unit, which makes chips for gaming consoles, grew 45 percent.

Software revenues were $4.2 billion, an increase of 5 percent, adjusting for currency, compared with the second quarter of 2005.

IBM posted a total gross profit margin of 41.2 percent, compared with 39.4 percent in the 2005 period, which includes the divested PC business. Excluding the PC business, the second- quarter 2005 gross profit margin was 40.6 percent.

The company repurchased $2.5 billion in shares in the second quarter and ended the quarter with $10 billion in cash on hand.

Endpoint's Kay does not own shares of IBM, and his firm does not do investment banking business. Reitzes of UBS does not own shares of IBM but his firm does and seeks to do business with the companies highlighted in its research reports. Misek of Canaccord does not own shares of IBM and his firm does not have banking ties to the company.

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