After nearly six years of year-over-year revenue declines, International Business Machines (NYSE:IBM) finally returned to growth last quarter. The long drought was the result of an ongoing transition from many of the company's legacy businesses, while it continued to develop its higher-growth segments composed of cloud computing, analytics, cognitive computing, security, and mobile. These businesses, which the company dubbed strategic imperatives, are seen as crucial to the company's evolution.

Going into IBM's first-quarter 2018 financial report, investors were hoping not only for the company's growth to continue, but also for evidence that its strategic imperatives gained further traction, and reassurance that the return to revenue growth wouldn't be short-lived.

While IBM did show top-line growth, it didn't fill investors with confidence.

A man and a woman work on IBM Z servers.

IBM servers are helping boost revenue. Image source: IBM.

Growth...of a sort

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

$19.07 billion

$18.16 billion

5%

GAAP net income

$1.68 billion

$1.75 billion

(4%)

GAAP earnings per diluted share

$1.82

$1.86

(2%)

Data from SEC filings. Chart by author.

For the just-completed quarter, IBM delivered revenue of $19.1 billion, up 5% year over year, and exceeding consensus estimates of $18.84 billion. Unfortunately, when stripped of the effect of the weak dollar on exchange rates, the results were flat compared to the prior year.

Revenue increased across all of the company's major business segments:

Major Business Unit

Q1 2018

Q1 2017

Year-Over-Year Change

Cognitive Solutions

$4.30 billion

$4.06 billion

5.8%

Global Business Services

$4.17 billion

$4.01 billion

4.2%

Technology Services & Cloud Platforms

$8.63 billion

$8.22 billion

5%

Systems

$1.50 billion

$1.40 billion

7.5%

Data from SEC filings. Chart by author.

Net income of $1.68 billion fell 4% year over year, producing earnings per share of $1.82, down 2% from the prior-year quarter. Adjusted earnings per share of $2.45 beat analysts' consensus estimate for the quarter, which called for $2.39 per share.

Strategic imperatives produced revenue of $37.7 billion over the trailing 12 months, up 12% over the prior-year period. These growth businesses now account for 47% of IBM's revenue over the previous 12 months. Cloud revenue during the same period increased to $17.7 billion, up 22% year over year.

During the first quarter, analytics revenue increased 9%, mobile sales jumped 19%, and security sales grew 65%.

Not there yet

There are several concerns that still weigh on the minds of investors.

One was the boost provided by system sales. IBM introduced newer versions of its mainframes last year, which has helped support the company's turnaround efforts. However, hardware sales are expected to decline later this year, which could make it difficult for the company to maintain its recent return to revenue growth.

Additionally, IBM continues to struggle with shrinking profit margins, though the company says it is seeing signs of "margin stabilization."

"The multi-year shift in our investment strategy is paying off as IBM leads in the emerging, high-value segments of the enterprise IT industry," said James Kavanaugh, IBM senior vice president and chief financial officer. "Revenue, operating net income, and free cash flow increased in the quarter, with broad-based improvement in our gross margin trajectory, as we continue to deliver shareholder value."

Looking ahead

IBM reiterated its forecast for "at least" $13.80 in non-GAAP operating earnings per diluted share, and GAAP earnings per diluted share of "at least" $11.58. The company continues to expect free cash flow of about $12 billion. IBM also expects strategic imperatives to produce trailing-12-month revenue of $40 billion by the end of 2018.

Even though IBM has returned to revenue growth, doubts remain. Growth based on a waning product cycle and exchange rate gains due to a strong dollar aren't sustainable. Additionally, investors are now more focused on the company's declining margins and profitability. It will likely be several more quarters before investors have confidence that IBM's turnaround is on solid financial footing.

Danny Vena has the following options: long January 2019 $165 calls on IBM. The Motley Fool is short shares of IBM. The Motley Fool has a disclosure policy.