What You Need to Know About IBM's First Quarter

Computing giant IBM (NYSE: IBM) reported first-quarter results on Tuesday. Currency exchange effects and a large bundle of tax credits led to mixed results, as Big Blue continued to restructure around its so-called strategic imperatives.

Here's a closer look at IBM's results.

IBM's first-quarter results: The raw numbers

What happened with IBM this quarter?

Sales under the banner of strategic imperatives rose 15% higher year over year, led by a 60% increase in data security revenues and 20% larger cloud service sales. These high-growth focus areas combined to represent 47% of IBM's total sales over the last four quarters. That's up from 46% three months ago and 42% as of the first quarter of 2017.

The bottom-line results included an $810 million bundle of tax benefits in the first quarter. This positive line item resulted from IBM settling several pending tax audits in the U.S. and abroad. One-time tax effects are a common theme in IBM's first-quarter reports, as that period coincides with the year-end tax season in many jurisdictions. For example, Big Blue recorded a one-time tax benefit of roughly $500 million in the year-ago period.

Currency exchange trends contributed all of IBM's revenue growth in this quarter, as currency-adjusted sales round off to a completely flat year-over-year comparison. At the same time, exchange-rate changes also drove IBM's operating expenses higher so the net effect to the overall bottom line was a wash.

What Big Blue's management had to say

In prepared remarks for the earnings call, CFO Jim Kavanaugh argued that IBM is performing according to plan.

"We made progress in our financial performance in the second half of last year, and now our first quarter results demonstrate further progress toward our model," Kavanaugh stated. "So, we're clearly moving in the right direction."

Change is always difficult, and IBM has been knee-deep in the stuff for several years now. According to Kavanaugh, the restructuring actions IBM took in the first quarter -- as part of a long-running and continuing program -- caused some pain on the first-quarter income statement but will set the company up for stronger profit margins in future reports.

"IBM is now a cognitive solutions and cloud platform company, focused on the high-value areas of IT," he said. "Our underlying operating dynamics show an improved gross margin trajectory, expansion of our pre-tax margin and solid growth in our operating earnings per share."

Looking ahead

The first quarter's results were in line with management's long-term projections, and the company is still aiming for the same full-year targets that were defined three months ago. As a reminder, that includes non-GAAP earnings of at least $13.80 per share, compared to $13.82 in the 2017 fiscal year. GAAP earnings should be no less than $11.58 per share, up from $6.14 per share last year. Free cash flows are aimed at $12 billion or more, a potential retreat from last year's $13 billion.

So, the story is the same as always. IBM is all about those strategic imperatives these days, and that category should soon account for more than half of the company's overall sales. It's a bumpy ride, but the progress toward more vibrant business shores is undeniable.

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Anders Bylund owns shares of IBM. The Motley Fool is short shares of IBM. The Motley Fool has a disclosure policy.