Like several other business IT giants, IBM (IBM) - Get International Business Machines (IBM) Report has promised for years that it will offset declines in older revenue streams pressured by cloud adoption and other trends by growing its exposure to cloud services and a handful of other targeted fields. Unlike some of them -- think Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report or SAP (SAP) - Get SAP SE Sponsored ADR Report-- Big Blue still hasn't done much to inspire confidence that its moves have left it well-positioned to deliver long-term organic sales growth.

And the company's latest earnings report, in addition to featuring its 20th consecutive annual revenue decline and accelerated margin deterioration, also raises questions about how some of the cloud services businesses that are a key pillar of its growth strategy are trending.

IBM reported first-quarter revenue of $18.2 billion (down 3% annually) and adjusted EPS of $2.38 (up 1%). While the latter beat a consensus analyst estimate of $2.35, the former missed an $18.4 billion consensus. The company is maintaining full-year guidance for adjusted EPS of "at least" $13.80 -- up from 2015, but below 2014 and 2013 levels -- and free cash flow (FCF) "in excess" of 90% of GAAP net income, which it has forecast to be about 13% below adjusted net income.

Shares are down 5% to $161.52 as of the time of this article. They've now given back the gains seen after IBM's Q4 sales/EPS beat.

Helping EPS beat estimates: IBM recorded $445 million in intellectual property (IP) and custom software development income, up sharply from last year's $217 million. The company also benefited from a low 15% "effective operating tax rate" and a near-$500 million "discrete tax benefit," though to be fair, these figures were roughly in line with guidance.

The IP income is also propping up FCF, which -- as shown by the full-year guidance -- continues to lag adjusted profits. IBM states Q1 FCF of $1.1 billion was flat annually after backing the year-ago impact of a big Japanese tax refund, but the figure doesn't appear to back out this year's discrete tax benefits or IP income growth.

In spite of the EPS beat, IBM's adjusted gross margin, pressured by a shift towards cloud revenue streams relative to higher-margin software license and on-premise services revenue, fell by 300 basis points to 44.5%. That's worse than the 180 basis-point decline recorded in Q4, and is on the minds of many analysts dissecting Big Blue's numbers. On its earnings call, IBM promised gross margin would improve sequentially over the course of the year, as it tends to do with the help of seasonality, but didn't promise a return to annual growth.

The largest factor behind the top-line miss was a 2.5% drop in Technology Services & Cloud Platforms revenue to $8.22 billion, below a consensus estimate of $8.46 billion. The division's growth rate represented a reversal from the 1.7% growth seen in Q4, and was blamed by IBM on deal slippage (often blamed by enterprise IT firms reporting disappointing sales) and decisions by two clients to bring operations in-house "due to regulatory and other unique circumstances."

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Importantly, this unit accounts for about two-thirds of IBM's cloud services annual revenue run rate of $8.6 billion. And while IBM's cloud run rate was up 59% annually, it was flat sequentially. For comparison, the run rate rose by about $100 million sequentially last year to $5.3 billion, while rising 46% annually. 

Seasonality is a factor behind the lack of sequential run-rate growth, but so might a lack of major M&A benefits. In January 2016, IBM closed a deal to buy the Weather Company's digital assets. Annual cloud growth benefited from that deal and the $2.6 billion April 2016 purchase of healthcare data/analytics firm Truven Health Analytics.

And with total infrastructure service revenue (cloud or otherwise) down 2% annually -- a reversal from Q4's 3% growth -- one also has to wonder if IBM's cloud infrastructure (IaaS) and web hosting business is losing share to Amazon.com (AMZN) - Get Amazon.com, Inc. Report, Microsoft and Alphabet/Google (GOOGL) - Get Alphabet Inc. Class A Report , and whether its traditional IT outsourcing business is now feeling more pressure from these firms. While IBM has differentiated cloud app platform (PaaS) solutions that rely on things like Watson and its industry-specific expertise, Gartner labeled the company's IaaS business a "niche player" in its 2016 Magic Quadrant report.

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Also weighing on IBM's top line: Systems (hardware plus OS software) revenue fell 16.8% annually to $1.4 billion, missing a $1.53 billion consensus. While the cyclicality of IBM's System Z (mainframe) business played a role, continued share losses for IBM's Power high-end server business to Intel (INTC) - Get Intel Corporation (INTC) Report Xeon servers were also a factor, and so was (from all signs) the impact of IaaS adoption on enterprise server/mainframe demand. Storage revenue was a bright spot, rising thanks to flash storage sales.

IBM's very profitable Cognitive Solutions unit, which covers numerous software products, was relatively healthy, with sales rising 2.1% to $4.1 billion thanks to analytics and security software demand. The Global Business Services unit, which features consulting, app services and business process outsourcing (BPO) business, saw revenue drop 3% to $4 billion (in line with expectations) amid stiff competition and cloud pressures.

IBM's total "strategic imperatives" revenue, which covers cloud, analytics, security and mobile businesses, did manage to rise 12% to $7.8 billion, nearly matching 2016's 13% growth rate. But that implies all other revenue fell about 10% to $10.5 billion.

Overall, it feels as if the qualifiers attached to the story IBM wants to tell keep rising. Yes, adjusted EPS is set to grow this year, but FCF will lag and gross margin is declining and IP income and low taxes are providing boosts and organic revenue growth remains absent.

And now the cloud growth story might have a blemish to it. A low valuation is keeping IBM shares from feeling more pain -- they only trade for about 13 to 14 times this year's FCF guidance -- but it remains as hard as ever to justify the kind of multiple expansion firms like Microsoft and SAP have seen.