There's been a lot of uncertainty surrounding International Business Machines (NYSE:IBM) recently, and shareholders have paid the price. After 22 quarters of year-over-year revenue declines, the company reported three successive quarters of improving revenue beginning in late 2017, giving investors hope that the worst might be behind the tech giant.

However, each of those three quarters was aided by a combination of favorable currency exchange rates and the current refresh cycle for the company's mainframes. This led to concerns about what would happen when IBM didn't have these tailwinds to fall back on.

This quarter, investors got the answer to that question, and it wasn't the news they were hoping for.

A woman at a workstation of an IBM Z Server

Image source: IBM.

More stagnant results

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$18.76 billion

$19.15 billion

(2.1%)

GAAP net income

$2.69 billion

$2.73 billion

(1.2%)

GAAP earnings per diluted share

$2.94

$2.92

0.7%

Data source: IBM Third-Quarter 2018 Financial Release. Chart by author. GAAP = generally accepted accounting principles.

IBM reported revenue of $18.76 billion for the third quarter, which missed the analyst consensus of $19.04 billion. Adjusted net income of $3.1 billion translated to adjusted earnings per share of $3.42, an increase of 5% compared to the prior-year quarter, and edging out expectations of $3.40 per share.

Exchange rates went against the company during the quarter. (Revenue was flat year over year when adjusting for currency, rather than down 2%.) This caused each of the major segments to produce flattish to lower revenue:

Major Business Segment

Q3 2018

Q3 2017

Year-Over-Year Change

Cognitive solutions

$4.15 billion

$4.40 billion

(5.7%)

Global business services

$4.13 billion

$4.09 billion

0.9%

Technology services and cloud platforms

$8.29 billion

$8.46 billion

(1.9%)

Systems

$1.73 billion

$1.72 billion

0.8%

Data source: IBM Q3 2018 Financial Release. Chart by author.

Revenue from cognitive solutions slipped 6% year over year, but would have declined 5%, adjusted for currency changes resulting from the stronger dollar. Global business services revenue was up 1% compared to the year-ago period, but up 3% when adjusting for fluctuations in currency. Technology services and cloud platforms fell 2% compared to the prior-year quarter, and would have been flat but for exchange rates. Systems sales edged up 1% year over year, or up 2% when adjusting for currency.

The vaunted strategic imperatives

One of the most disappointing aspects of the report was the performance of IBM's so-called "strategic imperatives". IBM has placed a great deal of emphasis on this group of high-growth initiatives, which includes analytics, cloud computing, security, and mobile.

Revenue from strategic imperatives over the trailing 12 months was $39.5 billion, up 13% compared to the prior 12-month period, and up 11% when adjusting for currency. For the current quarter, however, revenue from strategic imperatives came in at just $9.3 billion, up 7% year over year, but down from $10.1 billion a quarter earlier. This meant that strategic imperatives fell back to less than 50% of IBM's total revenue -- an important benchmark the company had achieved for the first time in the second quarter.

Cloud computing revenue for the trailing-12-month period was $19 billion, up 20% compared to the 12 months before that and up 18% when adjusting for currency. Unfortunately, for the third quarter itself, cloud revenue came in at $4.5 billion, up a more modest 9.8% year over year, compared to the 20% growth IBM achieved in the prior-year quarter.

"IBM's progress and momentum this year in the emerging, high-value segments of the IT industry are driven by our innovative technology, deep industry expertise and commitment to trust and security," said IBM CEO Ginni Rometty.

What the future holds

IBM held the line on its 2018 full-year forecast, saying it expects at least $13.80 in non-GAAP operating earnings per diluted share, and GAAP diluted earnings per share of at least $11.60. The company also said it expects free cash flow of about $12 billion, with a realization rate of greater than 100%.

While we don't rely on Wall Street's whims, they can help provide additional color. For the fourth quarter, analysts are calling for IBM to generate revenue of $21.82 billion, a decline of 3.2% year over year, and earnings per share of $4.85, down 5.6% compared to the prior-year quarter.

IBM has been touting strategic imperatives as the new direction of its business, and while the company has made progress, these initiatives weren't enough to prop up the company in the face of currency headwinds and the winding down of its server refresh cycle. Big Blue will have to do much better if it wants to convince investors that its turnaround is finally on track.

Danny Vena is long January 2019 $165 calls on IBM. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.