IBM on Thursday surpassed Wall Street estimates as it reported a 7% increase in fourth quarter revenue and a 12% increase in earnings per share, capping what CEO Sam Palmisano in a statement called "a terrific quarter."

For the period, IBM said revenues increased 7% year-over-year to $26.3 billion, while per-share earnings rose 12% to $2.26. Net income from continuing operations was $3.5 billion, an increase of 8% over the fourth quarter of 2005. On average, Wall Street analysts were expecting Big Blue to report fourth quarter revenue of $25.7 billion and per-share earnings of $2.19, according to a survey by Thomson Financial Network.

IBM reported a 7% increase in crucial IT outsourcing sales during the quarter -- to $8.6 billion -- while sales of business process outsourcing services increased 6% to $4.2 billion. Services sales account for about half of the company's revenue.

Fourth quarter sales of software, IBM's highest margin product line, rose 14% year-over-year to $5.6 billion. IBM's middleware and systems management lines of software, which includes the Websphere and Tivoli brands, posted a particularly strong gain -- up 18% to $4.4 billion.

The company's Systems and Technology Group, which includes servers and other computing hardware, posted a 3% year-over-year sales gain to $7.1 billion.

For the full year, IBM said revenue in 2006 was $91.4 billion, a 4% year-over-year increase when revenue from IBM's divested personal computer business, sold off in 2005, is excluded from the comparison. Earnings per share for the year were up 14% to $6.06, surpassing the consensus Wall Street estimate of $6.00.