Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I will turn the meeting over to Ms. Patricia Murphy, Vice President of Investor Relations. Ma'am, you may begin.

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. I am here with Schroeter, IBM's Senior Vice President and CFO, Finance and Enterprise Transformation. I want to welcome you to our fourth quarter earnings presentation. Prepared remarks will be available in roughly an hour, and a replay of this webcast will be posted to our Investor Relations website by this time tomorrow. I will remind you that certain comments made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the company's filings with the SEC. Copies are available from the SEC, from the IBM website, or from us in Investor Relations. Our presentation also includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to the related GAAP measures in accordance with SEC rules. You will find reconciliation charts at the end of the presentation and in the Form 8-K submitted to the SEC. Now, I am pleased to turn the call over to Martin Schroeter.

Thank you for joining us today. What we will do over the next hour or so is take you through our fourth quarter results, a wrap up of the year and our view of 2014 earnings per share and then we will take your questions. A month or so ago, before I assumed the CFO job I met with a number of investors and analysts, and one things I took away is that it's important for me to be clear on IBM's 2015 roadmap objective and our ability to achieve the earnings per share, so I want to start out by saying that we continue to expect to deliver at least $20 of operating EPS in 2015. We will talk about 2014 a little later and you will see that our view of 2014 keeps us on track to that objective. As we get into the fourth quarter results, you will see that our Software, Services and Financing businesses are all on solid ground, but in hardware, as you know, we went to the backend of the mainframe product cycle and we are dealing with some challenges in other areas. Together, these are impacting our overall results. IBM does have a resilient model based on continuous transformation and we are investing substantially in key opportunity areas. You have seen evidence of that in announcements we have made in the last two weeks and we are rightsizing and repositioning businesses where the market is shifting. This enables us to move to higher value and lead an enterprise IT. As always, we are positioning our business for the future, and as I noted, we continue to expect to achieve at least $20 in 2015 along the way, so now let me get into the results. In the fourth quarter, we delivered revenue…

Thank you, Martin. Before we begin the Q&A, I would like to mention a couple of items. First we have supplemental charts at the end of the slide deck that provide additional information. Second, I would ask you to refrain from multipart questions. Chris, please open it up for questions.

Thank you. (Operator Instructions) The first question comes from Ben Reitzes with Barclays. You may ask your question.

Thanks a lot. Martin, I really appreciate you talking about the first quarter which looks like it equates to $2.50 versus the consensus of $3.27. I was just hoping if you could confirm that. I think I got the math right, but my question is with regard to a bridge from 2013 to 2014. If I look at 2013, you had about $1.50 or so benefit due to tax rate year-over-year and my calculations are $1.10 in a hit maybe 2014, so considering that it seems like you have to have a significant gain maybe $1 to $2 of gain to get to dollars. Again, my question is, can you just confirm the $2.50 or so number for the first quarter? Then do you mind bridging us from '13 to '14 and tell me what's missing, because there is a big chunk missing and I think it's the gains from the sale. Thanks a lot.

Okay. Sure. Thanks, Ben, and thanks for the question. I guess, a few things I would say. I think your SKU math is consistent with how we would see it as well, so we will put that aside for now. On the full year, there are I think a number of issues that we should render explicit when we look at going from 2013 to 2014, so first in our 2014 guidance we do assume a gain from the sale of our customer care business which was announced last year we expect that the close. That will close in stages, some in the first, some in the second quarters and that will be in total about $150 million of pretax gain, so that that is in our guidance. There is not however another substantial gain or gain assumed in our guidance of at least $18 for 2014, but let me talk a little bit about how we see 2014 relative to what we faced in 2013. First, as you saw in our full year results and obviously really clearly in the fourth quarter, we had a substantial year-to-year profit headwind in STG. The STG business on a year-to-year basis for 2013 was down $1.7 billion worth of profit. Of that $750 million was in the fourth quarter, so the fourth, obviously, some of it was mainframe, the cycle and were not at all worried about the cycle as we talked about in the prepared remarks. We are very confident in the secular strength of the mainframe and the cycle, but we do have these small issues and in our p business, our x and our storage business, so on a year-to-year basis $1.7 billion of impact in STG. Now, within our guidance, we are going to get that profit impact…

Thanks, Martin.

Sorry, Ben, just one more thing. Before we get off STG, our game plan for STG is flat profit year-to-year. That is not our ongoing model for STG. So we will improve and we do expect that we will improve that model position of STG over time. 2015 will see another z cycle, so there will obviously be a little bit of tailwind there but I don't want to leave you with the impression that when we get this to your profit impact, that that's where we are stopping, we are going to get that business back to grow profit. Thanks, Ben.

Thanks, Ben. Can we go to the next question please?

The next question comes from Toni Sacconaghi with Sanford Bernstein. You may ask your question.

Yes, thank you, and good afternoon, Martin. I just wanted to follow-up on that last question. I really appreciate color. As was mentioned before, tax rate has been a huge, huge benefit for IBM in 2013. I think that your normalized tax rate of 23% earnings would have been up only about 2% year-over-year at about $15.60. Obviously you reported much higher than that. So if I think about your earnings on a normalized tax rate in 2014, they need to go from normalized $15.60 to $18 which is a 15% increase. So I understand that hardware is going to be flat. That made no money this year. But that implies that software and services are going to have grow EPS at 15% year-over-year, which neither did this year. So again if I look at it through that reality check lens, I guess the question is, particularly with a very difficult quarter, at the beginning of the year, how is it realistic that you get to 15% plus EPS growth off a normalized tax rate and can you be explicit about what you expect your actual accrued tax rate to be in 2014? You said normalized is 23%, but it has been dramatically lower than that in three of the last four quarters. So what's your operating assumption for tax rate in 2014?

Sure. Thanks, Toni, and good afternoon to you as well. So I guess I would say a few things. Our view of the tax rate is 23%. That's our operating assumption. That's our practical assumption. That's what we think the tax rate is for 2014. Now that does not have discrete items but we don't have a plan, if you will, for discrete items. We have an operating tax rate assumption of 23%, and as you point out therefore we do expect that we will have to refill it, if you will, the net income required to get there. I went through a little bit of the bridge with you, as you pointed out on STG for instance. I guess I would say a few other things. One, in terms of how we see the year rolling out. As you noted, first quarter, with the charge, we will obviously be down pretty dramatically with the charge in it and that will pay for itself, as I mentioned, through the year. Second quarter, without the charge now, will be up dramatically. So when we finish the first half, with those two elements in, we would see about low double-digit growth in EPS, when we exit the first half. Now we get to the second half and the second half also has some interesting dynamics. Third quarter, one that we have got, quite frankly, an easier compare and we don't have a lot of noise, if you will, from the tax rate in the third. Certainly not as much as we have in the fourth. So we would see third quarter growth and fourth quarter growth to be combined a high single-digit to get us to be at least $18, but on top of that we know that in the fourth we…

Just to clarify, Martin, for the restructuring expenses that you are expecting in Q1 and any others throughout the year. You don't expect any offsetting gains either concurrent in that quarter or at any other part of the year?

Well, again, just to clarify. In the first quarter, we do have the gain from the sale of our Customer Care business that will be in the first and some in the second as well, but that's all that's assumed in our guidance of at least 18.

Thank you.

Okay. Thanks. Could we please go to the next question?

The next question comes from Steven Milunovich with UBS. You may ask your question.

Martin, you talked about financial flexibility, could you expand on that a little bit? You have obviously got some cash on the balance sheet, but you do have a 39% debt-to-cap excluding the financing business, which looks to me it seem like there is not a lot of room to go there and you got certainly commitments to investors on dividends and share repurchase. Some are talking about the need for you to do more M&A given all the technology changes, but whenever I talk to IBM, it seems like you are still very much looking at doing smaller deals that you can really leverage through your global sales force. Do you anticipate any change with M&A and what's the financial flexibility that you refer to?

Sure. I guess, I would say a few things. First, as we have talked about for quite a while on our M&A, our strategy and our approach. We find that the financial returns and the economics of smaller deals, once we have put sort of that core competency, that core capability in place, we find that attaching smaller capabilities to those do drive exactly as you said, we are able to take advantage of those through our global distribution network, our global sales force and we get very good returns on those and we are very pleased with the way we run and the disciplined approach we have around acquisitions and we are going to continue to do exactly that. It's worked out quite well for us and we will continue to run a disciplined process and we will continue to run a process that looks to acquire content that fits around a set of capabilities that we have and that we want to expand and drive that through our global sales and distribution network to earn returns. That's been the model that's worked quite well for us and we will continue on that. Now, sometimes those deals are larger, sometimes are smaller. Large deal, we still think that a few billion dollar deal is still a pretty big deal. You still have to get these integrated into the business and that means teams and skills on the ground. We do have capacity to integrate any number of those deals at a single time. That's really one of the beauties of the skills we have built as we are able to do this five or six or seven or eight times simultaneously, so we are not constrained in our acquisitions by the number of teams we can put on the…

Thanks, Keith. Can we go to the next question please?

The next question comes from Peter Misek with Jefferies. You may ask your question.

Thank you. Just a question on Watson and some of your other Smarter Planet and analytics offerings. There has been a high-profile or at least the Journal reported recommitment or reinvestment. How should we think of that in the context of the $20 EPS bridge? What percentage of that EPS should we be banking on from these higher growth initiatives? Just to get a sense for what kind of growth rate we should be backing into.

Yes, okay. So, I guess I would make a few points. What we announced last week was the creation of a Watson Group and the Watson Group will have investment of a bit more than $1 billion focused on the development and the research around bringing these cloud delivered cognitive applications and services to the market. Now this is all delivered as a service, right? So it's not like you can't call it and say I want to buy a Watson. This is a service delivered through the cloud. We also announced that we would invest up to $100 million in venture investments to help support that ecosystem as the developers around the IBM Watson developers cloud build out their capabilities. So we announced those two things. It's a couple of thousand people. It's not a small effort,. It's pretty substantial effort. Now with regard to the 2015 roadmap, I think it's important to note that like a lot of things in IBM, these are long-term investments. We do manage the business for the long-term and while we have been clear that we believe we will achieve at least $20 of operating EPS in 2015 along the way, a lot of what we are doing is paying off down the road past that and I would put Watson into that category. So the Watson Group is part of, if you will, if you wanted to stick it into the roadmap, the Watson Group is within that overall business analytics content. Now, business analytics, for us, it hit nearly $16 billion. It hit $15.7 billion of revenue in 2013. Now the original time when we first started talking about our 2015 roadmap, we said that would be a $16 billion business. So we have since taken that up. We got there about two years early. We have since taken that up to $20 billion and the Watson Group will certainly be part of that $20 billion of revenue in the 2015 roadmap, but it is not going to be the thing that drives business analytics in that short time period. This is a much longer term investment and it's consistent with the way we manage the business. We see trends over the longer term. We have to obviously invest in those trends and this is a good example. So the Watson Group will deliver in the new field of cognitive computing. It does it through the cloud because it's going to be as a service kind of offering and we think building out this ecosystem with the right amount of investment is the right thing to do now, even though it's not going to be a big part of the 2015 roadmap.

The Business Analytics bridge remains the same? $20 billion is what we expect by 2015. I guess that was the more specific question as it's related to 2015?

Yes. That's correct.

Thank you.

Thanks, Peter. Can we go to the next question please?

Your next question comes from Jim Suva with Citi. You may ask your question.

Thank you very much. Martin, The signing that you had 17.5 this quarter. When we look at the full year rolls up to about 11% year-over-year which is very impressive. Can you just help us understand little bit about the last few quarters have been down year-over-year, so the first half of the year is very strong on your signings then they were soft in second half of the year. As that 11% rolls forward next year, should we look to start to see some healthy growth or is there a little bit of margin headwind from it, or how should we think about especially how the first half being so positive year-over-year and second half is slowing. I assume a lot of it has to do with the BRIC or growth countries, but maybe you can shed some light? Thank you.

Sure. Jim. Thanks for the question. I think there are a couple of points to made here. First, signings, as you know and you could hear it within the data you are quoting, signings can be volatile in any given quarter and backlog is another element that we have been sharing because that signings content all goes into a backlog and then it drives, obviously, the future revenue opportunity and I am going to come back to that in a second because your question, I think, about the future is more going to be around the backlog we see as opposed to maybe the signings in any given quarter. Now, backlog we finished up 5% year-to-year and full year Services signings were pretty strong growth on a constant currency basis, in fact, it's about the best growth we have seen in the past five years. Now in the fourth quarter, the signings were up 1% at constant currency versus the third and maybe this is to your point of how volatile they are. The third was down four, so we went from down four to up one. The dynamic we saw in going from third to fourth was interesting in that in the third our long-term signings were down double-digit, while in the fourth they swapped to up double digits, so very good performance in the longer-term, more transformational kind of content in the fourth and then in the shorter-term contracts they were up single-digit in the third and they moved to down double-digit in the fourth. Some of that is because we are mixing our signings. We are mixing our delivery to higher value managed services like business continuity and security and cloud, so you are exactly right, signings is obviously volatile. There is a bit of a shift…

Thank you, Jim. Can we go to the next question, please?

The next question comes from Scott Craig with Bank of America Merrill Lynch. You may ask your question.

Hi, thanks. Good afternoon. If I can get one clarification in there. The workforce rebalancing in the first quarter, is that included as an expense in the $18? Then my second question is around the cash flow. You did a great job of providing the bridge to kind of get to the $18 in 2014. Can you maybe go into a little more detail on some of the free cash flow pushes and pulls for 2014? Thanks.

Sure, absolutely. So first, just for clarification, our at least $18 of guidance is all-in. So it has workforce rebalancing charges in it. It has the small gain that we expect. It's all-in, of at least $18, all-in basis and like the roadmap, it's an all-in roadmap of at least $20. So if we were to just hit the bottom end of our current guidance of at least $18, we would have another $2 to go, to finish out that roadmap. So yes, it's on an all-in basis. On cash flow. So we had a difficult cash flow year in 2013. As you heard in the prepared remarks, we were down year-to-year, a bit over $3 billion. If we were to kind of split up the attribution for that, as we did on the call, operational performance, as I mentioned we lost $1.7 billion of profit year-to-year just in the STG business which had a profound impact on our cash. So operational challenges; we had a cash tax headwind in 2013 and then we had a slightly less efficient balance sheet working capital, if you will, in 2013 as well which drove the year-to-year decline in 2013. Now as we go to 2014, we said we will grow free cash flow by about $1 billion, a little bit faster than net income, but by about $1 billion. Within that $1 billion, we still have a cash tax headwind of about $2 billion this year. So a larger cash tax headwind but I want to talk about cash, and the bridge, by the way, comes from improved operational performance within the business and we will improve our working capital position, if you will. That will drive the year-to-year improvement in 2013 to 2014. But I would like to also spend a…

Okay. Thank you.

Good. Can we take the next question please?

The next question comes from Katie Huberty with Morgan Stanley. You may ask your question.

Thanks. Good afternoon. Coming into the fourth quarter, you expected better sales execution in China, which doesn't appear to have come through. Can you just talk about what you have learned over the past three months around the drivers of weakness in China and what you now think it takes and what the right timeline is to return to growth?

Sure. Thanks, Katie, and good afternoon. I will just go through a couple of data points here. As you saw, we did degrade to minus 3 on a constant currency basis in the fourth, from minus 2 in the third on a global basis. That one point degradation, when you look at the majors was really centered in the z cycle and centered in the U.S., so, I will leave that off to the side because, again, we are comfortable with the z cycle and where we are. When we look in GMU, which was the nature of your question, we did see that same one point degradation and it is not what we wanted to get done. Now, we continue to struggle in Hardware, we were still down double-digits in hardware, a little better sequentially from third to fourth, but still down double-digits. Services across the growth market areas went from a small positive to a small negative in GTS. GBS went from low single-digit growth to high single-digit growth, so they actually did quite well, but it's a smaller part of the business so it doesn't have as profound an impact on the overall, so when we looked at third quarter to fourth quarter, China is still an issue. Now, let's recognize that China is going through a very significant economic set of reform, so in March 2013, history that everyone knows, but on March of 2013 a new leadership team in November that they announced, some pretty significant structural changes and we referred to those in the last call and we are waiting to see what they were and they looked, in our opinion, they looked quite significant. Now, many of those changes will affect the state-owned enterprises and those state-owned enterprises are quite frankly some of…

Could you grow in China by the fourth quarter of this year? Will it take longer than that?

It's hard to tell. China is hard to tell, because I don't have a good sense of how those reforms work their way through the system and the decision-making that goes all around it. This is a, as I am sure you will appreciate it, pretty complex environment and it's difficult to gauge exactly what's going to happen on a roll-out basis. Now, if we look at the growth markets in total, we are comfortable that we are on a trajectory to growth. We will be on a trajectory to growth as we exit 2014 and we are comfortable that we get back to mid-single digits across the growth market regions by the end of the year but again, second half statement more than an immediate statement.

Thank you very much.

Can we go to the next question, please?

The next question comes from Mark Moskowitz with JPMorgan. You may ask your question.

Yes, thanks. Good afternoon, Martin. I appreciate the color today. I just want to come back to the tax rate, though. If we kind of adjust 2013 and 2014 for the tax rate, it really implies your business has to improve substantially moving through 2014. With China still kind of in this holding pattern, and your hardware still struggling, the high-end support seems to be a bit more of a secular challenge or technology challenge. What should investors think about as the top three pivot points that you are really looking to, to really have this confidence that you can reiterate both the $18 EPS target as well as the $20 target for 2015 notwithstanding the tax rate?

Right, so I guess, we did obviously get a substantial tax benefit in the fourth, but it's not that tax rate, I think it's really the underlying business that is what we are, obviously, focused on improving and again, as I said earlier, that hardware impact has been dramatic in all of 2013. The currency impact has been dramatic in 2013. So when we look at the other elements of our business, including in software, we will grow software very consistently with what we grew in prior years and that assumption is obviously within the at least $18, but it also is an assumption that we feel very comfortable with to get to the guidance for 2014. On services, we do see good momentum in GBS. We finished the second half of the year with double-digit profit growth in GBS. In GTS, based on the contracts we have and the time that those contracts have been in place and the productivity therefore that we believe we can drive out of services, we see services back at a model level of growth. Again, share repurchase and the overall enterprise productivity initiatives we expect that at least $18 is right in line with what we should be able to deliver. The other element of this is, we don't have a year-to-year impact from our restructuring in 2014. It was $1 billion last year. It will be about $1 billion again this year. So we eliminate that year-to-year and without the year-to-year impact from hardware that allows that software and that services profit growth to show up in the bottom line. So without the hardware profit growth impact, less of an impact from currency as we stated, services performing at model, if you will, and software at its historical growth rate along with EPS, we will refill that tax impact and get back to $23, but importantly we are comfortable with the at least $18.

Can we go to the next question, please?

The next question comes from Brian White with Cantor Fitzgerald. You may ask your question.

Yes. Hi, Martin. Just a clarification. In the March quarter, you expect $1 billion restructuring charge from rebalancing activities and $150 gain from the sale of assets. Is that correct?

Yes. I think the $150 is--

The $150, it will close over the first half.

Right.

Okay.

The $150 closes. It's not all in the first quarter.

Because I think when you are saying 14% of the year's EPS, that the $18 is in the first quarter, this is really a number that includes a massive restructuring charge that is normally allocated over a years' time. So my question is why don't we back out when we restructure restructuring charge, which is non-operating and back out gains when we have gains, which are not operating. I think investors would like that because it gives them a view in the operating performance of IBM?

Well, I guess I would say a few things. So first, just to make sure you are clear. The first quarter we would expect a substantial charge, right, about same as last year, plus or minus $100 million, and we have the gain, but not all 150s some of it. The roadmap we have laid out, the roadmap is a way for us to allocate capital and it's a way for us to describe to investor how we shift the portfolio that shift of the portfolio includes acquisitions includes divestitures, it includes our rebalancing the workforce and all of that translates to an EPS at the end. That EPS is reflective of all those activities. It's got the workforce rebalancing, it's got the gains if there are any, it has got the shift of investment, the roadmap is in an all-in basis, if you will, and our guidance is also on an all-in basis. I think, the right way to look at our business is to keep it on the basis in which we have described our longer term performance, not only two years away from the end of the roadmap now, but our longer term performance is one where as we shift the value, we acquire, we divest and it is important I think to look at the totality of that earnings power and that's the way and again that why we built our roadmap the way we built the guidance.

Okay.

Okay. If there was a gain later in the year, that would be incremental to the 18, but it is not currently in your guidance, outside of the 150?

As I said the only gain we have is this first half, it is $150 million gain. That's what we have in our guidance.

Right. Thank you.

Can we please take one more question?

Thank you. The last question comes from David Grossman with Stifel Nicolaus. You may ask your question.

Thank you. Hi, Martin. I was wondering if we could just go back to the Services numbers just for a minute, and my recollection from the third quarter call was that there was an expectation is that sequentially the year-over-year growth rates would improve for both, GBS and GTS. Can you help us understand what items maybe impacting the Services growth other than the GMUs and how we should think about the trajectory of that business in 2014, particularly given the headwind to backlog from the sale of the customer care business?

Sure, David. You know, GBS grew 4% which was in line with its prior quarter, and we think even within that we took share, within that GBS content, we continue to move capability toward our Digital Front Office offerings and those have been very successful and so what's driving the growth in GBS, it's both, our success in the Digital Front Office and the momentum coming from business we have booked into the backlog in prior quarters and we see that continuing on the GBS side into 2014. In GTS, the growth markets were an impact in GTS in the fourth. Now, we think when we look at that business and its trajectory changed from two-fourth from the third, we do see a continued investment required in some of our growth market clients, which is driving some of that content and we have signed some big contracts during the year. We see us in a stage of early stage of some contracts where the productivity quite frankly as you would expect, is not as high, so as we get into 2014, and those contracts specifically mature, and the investments we have made in some of those GMU clients payoff, we do see a bit of a tailwind. Now, on the revenue side in GTS, as you pointed out, we do see growth in the backlog, but we are going to lose the impact of the customer care business, which we think, again, knocks the revenue side of that down to a small negative.

Okay. Thanks, David. I want to thank you all for your questions and now I am going to turn it back to the operator.

Thank you for participating on today's call. The conference has now ended. You may disconnect at this time.