Following a disappointing first-quarter report in April, International Business Machines (NYSE:IBM) provided an encore performance on Tuesday. A 4.7% year-over-year drop in revenue was worse than analysts were expecting, with every segment reporting a decline. IBM's strategic imperatives, which includes growth businesses like cloud computing, analytics, and security, grew sales by just 5% year over year, or 7% adjusted for currency.

It wasn't all bad news. IBM handily beat analyst estimates for earnings, reporting adjusted EPS of $2.97, $0.23 ahead of expectations. The company also reiterated its full-year guidance, which calls for adjusted EPS of at least $13.80, and roughly flat free cash flow year over year. IBM expects the second half of the year to be stronger than the first, driven by service contract signings, including a $1.7 billion cloud services deal with Lloyds, the launch of the new IBM Z mainframe, and an upcoming refresh of its Power servers.

IBM's Global Center for Watson IoT in Munich, Germany.

Image source: IBM.

IBM's mixed second quarter drew some analyst downgrades. Cantor Fitzgerald kept the stock at neutral, but knocked its price target down from $166 to $154. This comes a few days after Jefferies maintained its underperform rating on the stock but slashed its price target from $154 to $125.

Here are a few key points from IBM's second-quarter report.

Revenue keeps falling

The second quarter marks the 21st consecutive quarter of year-over-year revenue declines for IBM. Currency played a role, with revenue adjusted for currency declining by just 3.3%. But this result continues a long streak that investors would no doubt like to forget.

A chart showing IBM's reported and adjusted year-over-year revenue change over the past few years.

Data source: IBM. Chart by author.

One thing to remember about IBM is that revenue growth isn't the main goal. CFO Martin Schroeter, appearing on CNBC's Closing Bell on Tuesday, reiterated this point: "It's easy to get revenue in an enterprise space. It's finding the profit that we're focused on."

This is a similar statement as one made by IBM CEO Virginia Rometty during a conference in late 2015:

What's important is that we grow in the right areas. Tech is littered with areas that you can have high growth and make no money. That's not us.

In a market where tech companies with quick growth and big losses are given premium valuations, IBM is a fish out of water. Revenue growth will need to return before IBM stock can truly recover.

A strategic imperatives slowdown

After a long streak of double-digit growth, IBM's growth businesses slowed down during the second quarter.

Category

Revenue

Growth (YOY)

Analytics

$5.1 billion

6%

Mobile

$1.2 billion

29%

Security

$0.6 billion

5%

Social

$0.3 billion

3%

Cloud (spread throughout other categories)

$3.9 billion

17%

Data source: IBM. Revenue growth adjusted for currency. 

IBM's cloud computing business still produced double-digit growth, and its cloud-as-a-service annual revenue run rate jumped 32% to $8.8 billion. Over the past 12 months, the cloud business produced $15.1 billion of revenue, and the strategic imperatives accounted for 43% of IBM's total revenue.

IBM pointed out in its earnings presentation that growth in strategic imperatives reflected organic performance, so the slowdown may be the result of acquisitions not contributing as much as they did in prior quarters. Still, the story at IBM is that these strategic imperatives will eventually return the company to growth, so the end of double-digit growth is at least a little concerning.

Earnings growth

At the end of the day, a company's value is based on its profits, not its revenue. IBM managed to grow its adjusted per-share earnings during the second quarter, producing EPS of $2.97, up about 1% year over year. This puts the company on pace to hit its full-year earnings guidance.

Unfortunately, this earnings growth wasn't driven by the underlying business. IBM reported a GAAP tax rate of 4.5% and a non-GAAP tax rate of 9.2%, both knocked down due to discrete tax benefits. These benefits added $0.18 to the EPS. The good news: IBM would have still beaten analyst estimates even after backing out the lower tax rate. The bad news: earnings would have declined compared to the same period last year if not for the lower tax rate.

While IBM sees adjusted earnings per share rising this year, that increase will be less meaningful for investors if it's not being driven by improvements in the business itself. What's clear from the second-quarter report is that IBM still has a lot of work to do. The second half will look better than the first, but the jury is still out on whether the company's transformation will ultimately be a success.

Timothy Green owns shares of IBM. The Motley Fool recommends Lloyds Banking Group. The Motley Fool has a disclosure policy.