Mixed bag for Big Blue: IBM Q1 profits top views, but sales lag

It's not quite a turn around yet, but IBM (IBM) CEO Ginni Rometty finally had some decent results to crow about in the first quarter, or maybe more like adjusted decent results.

At first glance, it was another down quarter for Big Blue, its 12th-consecutive quarter of declining revenue. Sales on continuing operations of $19.6 billion were down 12% from last year and missed analysts' forecasts of $19.7 billion, according to FactSet Research Systems.

But, excluding businesses IBM is divesting and adjusting for an 8% drop due to foreign currency moves, the company's sales were actually flat from a year ago. And after almost three years of falling sales, even adjusted flat sales are an improvement.

"We had a strong start to the year," Rometty said in statement, though for the second quarter in a row she skipped the company's call with analysts. "Our strategic imperatives growth rate accelerated, demonstrating the power of our offerings in these new opportunities and contributing to improved revenue performance."

Those strategic imperatives include efforts like IBM's partnership with Apple (AAPL) to write business apps for the iPad, cloud computing services and the many spin-offs from its Watson "big data" analytics program. Meanwhile, formerly strong businesses like outsourcing, consulting and some older hardware are suffering in the market.

Investors aren't cheering yet. After gaining 3.4% in regular trading, shares of Armonk, NY-based IBM lost 0.5% in extended trading. At $165.30, the shares remain at about the same price they were four years ago, before Rometty took over as CEO.

Rometty is still trying to engineer a massive shift at IBM away from increasingly commoditized hardware sales and toward theoretically more profitable software and service offerings. But while the company sold its server unit to Lenovo last year and plans to unload its chip business to GlobalFoundries later this year, the remaining businesses have yet to prove that they can pick up the slack.

One bright spot in the first quarter was a decidedly non-commoditized hardware offering, the company's newest line of System Z mainframe server computers. Sales more than doubled from a year ago, helping IBM's hardware unit revenue beat analysts expectations. IBM reported $1.7 billion versus analyst estimates of $1.3 billion, according to FactSet.

"This was not a surprise to us," CFO Martin Schroeter said on a call with analysts. "I don't think the mainframe is fully appreciated."

Another bright spot came in the still-nascent cloud computing effort. Without revealing actual revenue for the quarter, IBM said sales of cloud services rose more than 60% from the same period last year, or 75% adjusted for currency movements and divested businesses. Cloud services had an annualized run rate of $3.8 billion up from $2.3 billion a year ago, IBM said.

Still, analysts on a call with Schroeter questioned whether the newer businesses were growing fast enough to make up for declines in more traditional units. Aside from the mainframe surprise, Bernstein Research analyst Toni Sacconaghi said the quarterly results suggested that the "core businesses are actually getting worse."

Digging into the results, adjusted earnings per share of $2.91 beat the average estimate of $2.82. The figures exclude charges from amortization and acquisitions, as well as charges for pension-fund changes, IBM said. On the basis of generally accepted accounting principles, IBM reported earnings per share of $2.44, flat from the year-ago period.