International Business Machines (IBM -0.18%) beat analyst estimates for both revenue and earnings when it reported its first-quarter results on Tuesday. The company also reiterated its full-year guidance and produced double-digit growth in its key growth businesses. But the market wasn't thrilled with the numbers, sending the stock tumbling the next day.

There were plenty of things to like about IBM's first-quarter report, but also a few things that seem to be giving investors pause. Here's what you need to know.

Employees working on two IBM z14 mainframe systems.

The z14 mainframe. Image source: IBM.

The headline numbers

IBM reported first-quarter revenue of $19.1 billion, up 5% year over year and $370 million higher than the average analyst estimate. That's the best result IBM has reported in many years, and it's the third revenue beat in a row for the tech company.

The not-so-great news is that this growth was driven entirely by currency. Because IBM generates the majority of its revenue abroad, a weakening U.S. dollar produces a tailwind for the company's top line due to currency translation effects. Adjusted for currency, IBM's revenue was flat compared to the first quarter of 2017. That's worse than the 1% constant-currency growth the company reported during the fourth quarter.

On the bottom line, IBM reported GAAP earnings per share of $1.81 and non-GAAP earnings per share of $2.45. That non-GAAP number, which IBM calls operating earnings, grew 4% year over year and beat analyst expectations by $0.06. Both numbers include pre-tax charges of $613 million related to some restructuring actions and an $810 million discrete tax benefit. The net result of these items was a $0.05 reduction of non-GAAP EPS.

Gross margin and guidance

2018 is supposed to be the year that IBM's margins begin to stabilize. The first quarter was a mixed bag on that front. Non-GAAP gross margin slumped 0.7 percentage points year over year, with a 0.4-percentage-point impact from the two discrete items mentioned above. That's a smaller decline compared to the fourth quarter, when IBM reported a 1.4-percentage-point drop in gross margin. But it's still a decline.

IBM kept its full-year guidance the same despite the earnings beat. The company expects to produce non-GAAP EPS of at least $13.80, along with free cash flow of $12 billion. Taxes are a headwind this year, with IBM expecting a non-GAAP tax rate excluding discrete items about 4 percentage points higher compared to 2017. That will be offset by revenue growth, operating leverage from the expansion of its growth businesses, and share buybacks.

Strategic imperatives, cloud, and the mainframe

While overall revenue growth slowed down adjusted for currency, IBM's strategic-imperative growth businesses continued to expand at a double-digit rate. Strategic-imperative revenue jumped 15% year over year to $9 billion during the first quarter, or 10% adjusted for currency. Cloud revenue soared 20% to $4.2 billion, or 14% on an adjusted basis, while the exit annual run rate of cloud delivered as a service jumped 25% to $10.7 billion.

One driver of this growth was IBM's z14 mainframe system, which began shipping toward the end of the third quarter of last year. Mainframe sales soared during he second half of 2017, and that momentum continued in the first quarter with a 54% year-over-year sales increase. Power hardware sales grew at a more modest 3% rate, while storage sales dropped 15%.

During the first quarter, the systems segment, which includes hardware as well as operating systems software, accounted for about $700 million of strategic-imperative revenue and $500 million of cloud revenue. The mainframe helped maintain double-digit growth in each during the first quarter, but it will turn into a headwind during the second half once the z14 launch is lapped.

The end of the beginning

IBM's transformation has reached a new phase, with revenue growing again and gross margin starting to move less strongly in the wrong direction. But the company still has a lot of work to do before it will be able to hit its long-term targets. IBM expects to settle into low-single-digit revenue growth, mid-single-digit pre-tax income growth, and high single-digit EPS growth in the long run. It's not quite there yet, especially when excluding currency-related growth.

One thing that's clear from the post-earnings stock slump: The market just doesn't believe in IBM's turnaround story. It will take more than what the company could muster in the first quarter to change enough minds to finally lift the stock out of the doldrums.