The IBM logo is seen outside the company's offices in Petah Tikva, near Tel Aviv,the second most populous city in Israel on Oct 24, 2011.[Photo /Agencies]

IBM reported a 4 percent drop in third-quarter revenue, worse than expected by Wall Street, amid a decline in hardware and emerging markets even as it beat earnings estimates.

IBM shares fell 6 percent in after-hours trade to $175.56.

Chief Financial Officer Mark Loughridge said on a conference call for investment analysts that third quarters tended to be difficult for the world's largest technology service provider but added the company faced some particular challenges this year.

Profitability in its hardware business declined by $1 billion year-to-date and currency effects had a $500 million year-to-year negative impact, he added.

There is increasingly less demand for hardware as software replaces traditional infrastructure. IBM has recognized that trend and is itself shifting to become a more software focused business.

Hardware was mostly hit in China, which Loughridge said broadly accounted for about 5 percent of IBM's business and about 40 percent of that business was hardware.

China's growth has slowed this year, impacting corporate and public spending as the country develops an economic reform plan.

"As far as the growth markets are concerned, we will be dealing with the China impact for another couple of quarters," Loughridge said.

Revenue dropped 4 percent to $23.7 billion, below Wall Street analysts' expectations of $24.74 billion, mainly due to the decline in its hardware division, excluding its System z mainframe servers, and in emerging markets, which were down 9 percent.