NEW YORK (TheStreet) -- IBM (IBM) continues to struggle as it attempts to turn its business around, even though its key strategic areas -- cloud, data analytics, social, mobile and security -- are growing faster than its overall business.
The five strategic areas, which IBM hopes will generate $40 billion in annual revenue by 2018, grew 30% year over year (adjusted for currency) and 20% when factoring in moves in the foreign exchange market.
Still, IBM sales declined for the thirteenth straight quarter, missing analysts' estimates.
In the second quarter, IBM earned an adjusted $3.84 a share on $20.8 billion in revenue, as currency volatility impacted revenue by $2.1 billion. Analysts surveyed by Thomson Reuters expected the company to earn an adjusted $3.78 a share on $20.95 billion in revenue.
Shares of IBM were plunging in early Tuesday trade, down 4.4% to $165.60 following the results.
The company kept its earnings outlook for 2015 intact, as it continues to expect to earn between $15.75 and $16.50 a share during fiscal 2015. IBM, which sports a 3% dividend yield, did modestly bump up its free cash flow guidance for the year, as it expects to show a modest increase compared to a flat previous estimate.
Here are the three biggest takeaways from the quarter.
1. Fallin' for free cash
At this point in its 104-year old life, IBM isn't going to grow its top-line business like other tech companies such as Salesforce.com (CRM), Workday (WDAY) and other high-growth names, but any uptick in free cash is noticeable.
IBM funds its dividend and buyback program through its free cash flow, so any time an uptick in free cash is mentioned, it should be noted by investors. IBM raised its free cash target higher for the year because it had more visibility, CFO Martin Schroeter said in an interview after the earnings call.
"We had more of a track record to get under our belt and with half a year in the books, we felt comfortable guiding modestly higher," Schroeter said.
2. Software margins are still a concern
As the company continues to transition to delivering software via the cloud as well as other services, there is the concern that it's actually hurting margins as opposed to helping them, despite software generally having higher margins than hardware.
IBM's software group's gross profit margin level in the quarter was 87.8%, down from 88.8% in the year-ago period.
On the conference call, Schroeter tried to assuage fears that the company's software-as-a-service business was actually hurting IBM. Schroeter noted that while the SaaS business had "slightly lower margins" than the company's on-premises software business, it was "still highly accretive to the overall IBM model" since SaaS was in spaces the company is not currently in.
IBM's net margins were also lower than expected due to continued reinvestment in the strategic imperatives.
Despite these comments, analysts remained wary of the company's push to the cloud in the short term.
"We believe the shift to the Cloud may ultimately be margin dilutive for IBM, even if it drives revenue for the company," Credit Suisse analyst Kulbinder Garcha wrote in a note to clients. Garcha rates IBM "underperform," with a $125 price target.
3. Effects of FX
As with other multi-national companies, IBM has had to deal with the volatility in the foreign exchange market when other currencies must be converted to a strong U.S. dollar. For this quarter, IBM said it lost $2.1 billion in revenue due to the foreign exchange market, shaving 9% off the top line. That's worse than the first quarter, BMO Capital Markets Keith Bachman noted, who wrote in a research note revenue was impacted by 8%.
This is likely to be an ongoing theme for IBM for some time. Schroeder said that IBM's earnings are likely to be impacted by about 80 cents a share in 2015 due to currency factors. Schroeter also noted the impact had gotten worse in the last 90 days ago, which could hurt results for the second half of the year, although he said that likely wouldn't change the company's earnings guidance.
"So, yes the impact to EPS is probably a little bit worse than what we had assumed," Schroeter said on the earnings call. "We do have actions underway to try to navigate through whatever currency environment we're in, but the year-to-year impact is still fairly substantial in our guidance."