International Business Machines, whose shares had closed up 2 percent on Tuesday, reported revenue of $24.7 billion (15.5 billion pounds) -- flat with the previous year and below analyst expectations for $24.78 billion, according to Thomson Reuters I/B/E/S.
The company, which has been shifting its focus from hardware to higher-margin services and software over the past decade, raised its full year target to at least $15 adjusted earnings per share on strong demand for its software services and growth in emerging markets.
Analysts had on average anticipated $14.94. IBM's previous target was for at least $14.85.
Despite the share reaction, some investors were heartened by the strong guidance for the full year and IBM's profit growth.
I think the stock was priced for perfection, said ISI Group analyst Brian Marshall. Revenue was a little light relative to expectations. They did a good job on the bottom line. The guidance was good.
IBM's Chief Financial Officer Mark Loughridge promised IBM would deliver revenue growth again in the second half of the year once it overcomes some obstacles in the second quarter such as currency headwinds and two challenging projects in Japan.
I think stabilizing Japan in the second half and seeing the new announcement contribution from our hardware base of business, that's going to be a significant dynamic, Loughridge said on a call with analysts, adding that the challenges in Japan were a bit of an anomaly.
ISI's Marshall said IBM was careful to pursue revenue that would also lead to margin growth.
What they're doing is maximizing their operating margins by making sure they're not taking on revenue opportunities that aren't going to give them high margins, Marshall said.
Loughridge said the software business -- IBM's largest segment -- had a strong quarter with revenue of $5.6 billion, up 5 percent and that its smallest unit, the systems and technology business, declined as expected, falling 7 percent.
In services, IBM said its IT consultancy unit GBS declined 2 percent mainly due to problems in Japan and little demand in the public sector, while demand for its infrastructure services grew 2 percent.
Asked about his expectations for Europe, Loughridge said it looked pretty stable, noting that growth in the United Kingdom and Spain was particularly strong.
Rival outsourcing company Accenture cheered investors last month by beating expectations on strong growth in Europe, especially after competitors such as Infosys and Cognizant had warned of lower IT spending due to the Eurozone debt crisis.
IBM also competes with business software makers Oracle Corp
IBM said earnings per share, excluding items, in the first three months of the year were $2.78 -- beating average analysts' earnings per share of $2.65. Net earnings rose 7 percent to $3.1 billion.
The company's shares fell 2 percent to $203.50 in late trade after closing up 2 percent at $207.45 on New York Stock Exchange.
(Additional reporting by Sinead Carew; Editing by Bernard Orr)