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 Martin Schroeter, IBM’s Senior Vice President and CFO, Finance and Enterprise Transformation. I want to welcome you to our first quarter earnings presentation. The prepared remarks will be available in roughly an hour and a replay of this webcast will be posted by this time tomorrow. I will remind you that certain comments made in this presentation maybe 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 their 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 will turn the call over to Martin Schroeter.

Thank you for joining us today. As we get into the first quarter results, you will see that our performance reflects the actions we talked about in our last call. We are transitioning to key growth areas and transforming parts of the business. In the quarter, we announced a $1.2 billion investment to globally expand our SoftLayer cloud hubs. We launched BlueMix, our new platform-as-a-service to speed deployment of hybrid clouds. We acquired both Aspera and Cloudant to extend our capabilities in big data and cloud. We are expanding our ecosystem around OpenPOWER. And we created an integrated business unit around Watson and announced $1 billion dollar investment to bring cognitive capabilities to the enterprise. As we move to these growth areas, we are also taking portfolio actions to divest businesses that no longer fit our strategic profile. In January, we had the initial closing for the divestiture of our customer care BPO business and we announced the sale of our industry standard server business to our partner, Lenovo. This quarter, as expected, we took a substantial charge to align our resources and skills to the demand profile we see. This charge impacts our results this quarter, but it will pay back within the year. So, we got a lot done this quarter. Many of these actions impact our top and bottom line in the short-term, but have long-term benefits. For the quarter, we delivered revenue of $22.5 billion and operating EPS of $2.54. Our software performance was driven by 5% constant currency growth in key branded middleware. We are continuing to see strong client demand and great results in areas like mobile, cloud and security, where we have been targeting our investments. Our services business was up 2% at constant currency, with growth in both services segments, adjusting for…

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

Thank you. At this time, we would like to begin the question-and-answer session of the conference. (Operator Instructions) The first question comes from Toni Sacconaghi with Sanford Bernstein. You may ask your question.

Yes, thank you Martin. I was hoping that you could confirm that you still expect to meet your free cash flow goal for this year of $16 billion? And secondly, in terms of goal setting, you now have a much lower tax rate for the full year than you anticipated three months ago? I think that’s going to add about $0.70 to EPS that was not anticipated three months ago. You also mentioned there maybe discrete items. So I would like to understand on that a) why the tax rate changed so significantly in three months and secondly, do you have anticipated discrete items over the course of the year and can you share those with us?

Sure, Toni. I guess, first on free cash flow as we noted in the prepared remarks, our free cash flow was $600 million in the quarter and down about $1.1 billion year-to-year. Now, as we noted that’s it represents – the first quarter always represents a fairly small amount. Now, to answer your question, I am going to go through some math in a second, but to answer your question, we still do expect to grow free cash flow year-to-year even though we do have a tax headwind this year. So, the short answer to your question is yes, we still expect to grow free cash flow. When we adjust – when we look at our free cash flow on a year-to-year basis and we start to put in a more normal like a model tax rate if you will. So we had as you can see in our data big tax headwind, but in total, we paid about $2.6 billion of cash taxes in the year. So that’s an 80% rate in the quarter. Obviously, that’s not a rate driven by – our model is not driven by the way the business runs, but it just reflects really the tax audit that we finished in the fourth quarter and the related payments around that. So we had a very high rate in the quarter. Last year, we had a rate of about 30%. And so that $1.4 billion year-to-year, which we identified as driving – would have driven $300 million year-to-year. The factors on kind of a rate adjusted or model basis, we would have grown faster again. So, I am very comfortable with the free cash flow generation in the business. I think we are on track to deliver the full year and the cash flow growth. Again,…

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

The next question comes from Bill Shope with Goldman Sachs. You may ask your question.

Okay, great. Thanks. I just wanted to get a clarification on Toni’s question for the full year guidance. I mean, given the lower tax rate, as Toni mentioned, you are still offering the same EPS guidance. So, without the lower tax rate, it is a net guide down. So if so, could you comment on what exactly has changed above the tax line versus your prior expectations and the expectations you gave us in January?

Sure, sure. So we got a lot done in the first quarter. I mentioned some of those in my prepared remarks, right. And roughly speaking if I were to net it down, we continue to move our investments and our resources to where we see the needs of our enterprise clients and we continue to – we divested a pretty substantial business in x series that didn’t fit our high-value model. So though we did get a lot done in the quarter, now we also as you would expect look at the trajectory we see coming out of the quarter in order to get the right guidance for the year. And I guess I’d go through it – I’ll go through it by segment, but first I think it’s important to note that we did not see much improvement in the trajectory in the GMU in the quarter. We were down 5% in the first quarter. We were down 6% in the fourth quarter. So, we are not seeing a trajectory improvement. GBS, as an example, just within the GMU went from high single-digit growth to low single-digit growth. So, we are not seeing the trajectory improve in the GMU as an example. Now, looking at the segments at a higher level or the complete segment view, in services, when you adjust for the charge we took, because again, we will earn that charge back through the year. When you adjust for that charge, we did expand margin in the first quarter. And we would expect that to continue. So, in services, relative to last year when we grew profit in low single-digits, we are really only canning on kind of mid single-digit growth across those businesses. In software, we continue to see an improving growth rate in software and revenue, which obviously drives profitability. And then in hardware, hardware was down 23% constant currency. And we expect both the cyclical and the secular challenges that we see in that space to continue. So, as we said in the last call, our focus in hardware is really to stabilize that profit base on a year-to-year basis. So, we do see the ships we are making into the growth areas are absolutely the right things to do. We are being successful in growing that part of the business and our 1Q trajectory really reflects I think no real improvement in the GMU.

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

The next question comes from Rob Cihra with Evercore. You may ask your question.

Hi, thank you very much. If you look at the hardware losses and with divesting the x86 business, I mean that will help margins, but it won’t necessarily change your cost structure that much. I am wondering, I mean, is it that this business is now just subscale, particularly including the microelectronics business or do you think it’s you are just unfortunately at the bottom of mainframe and power cycles? And when you include the POWER8 and you include the power on Linux, you think you can sort of grow your way out of it or do you think it’s sort of an actual cost structure that’s now just too high for the business? Thanks.

Yes. I’d say a few things, Rob. First, we – the mainframe revenue growth, absolutely reflects where we are in the cycle. There is not a secular challenge in mainframe at all. So the mainframe growth rates are absolutely cyclical and when we – when it’s not a scale when we get to announce the new mainframe that will absolutely turn. In Power, as we have said last time we did have too much structure there was a secular issue in Power particularly at the low end. Now we have said we were going to address that with a few different actions. First, we have said OpenPOWER will be a tremendous benefit to opening up that technology and getting more users on that platform. And we think OpenPOWER over the long-term will have a pretty solid impact and improving that platform. Secondly, we said that we have POWER8 coming. We had this in the prepared remarks and POWER8 is highly relevant to big data workloads relevant to the cloud. And so the secular move from low end power on to industry based servers we will battle back with POWER8 in a much better offering in that space. And then thirdly, we did have too much structure on POWER8 – I am sorry in Power. And we did manage to get a fair bit of structure out of that business to set a cost base into the Power platform. In total on STG, let’s go back to the total for a second. There is obviously a GP margin impact in the first quarter, down year-to-year. Some of that is obviously driven by the mainframe cycle and its lack of contribution if you will, lack of mix to the high end. Some of its driven by the cost base, none of the improvements that we have made are really felt in the first quarter. And then it is relative to what’s going to come next in second through fourth it is the lowest transaction volume quarter. So there is a – there is just a high fixed cost base relative to what we have coming forward in the rest of the year. So I think that the STG business is on a path that we will achieve what we set out to achieve at the beginning of the year which was to stabilize that cost base and the profit base.

Thanks Rob. Can we go to the next question please?

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

Yes, thank you. You talked about a couple of financial measures first your share repurchase was very large this quarter, could you talk what you anticipate going forward. I am assuming it was pretty front end loaded but kind of what do you see for the full year. And perhaps related to that you had roughly doubled your non-financed debt over the last year, did you say that you would take that ratio from 55% down to roughly 39% by the end of the year which is where you have ended last year?

Sure Steve. So on share repurchase we did front end load this year’s share repurchases. So we would expect on a full year basis to finish probably a little bit less than where we were last year. So we will continue to return capital to shareholders through the rest of the year, but it will be at a reduced rate relative to the first quarter. And then on a debt to capitalization ratio which you noted was 55%, we will probably run in the 50s in the next couple of quarters, but we will be back down to that where we started the year again by the end of the year.

Okay, thanks Steve. Let’s go to the next question please.

The next question comes from Ben Reitzes with Barclays. You may ask your question.

Hi, I think investors are focused on this, so I am going to just try clarify it on the free cash flow side, what I am really confused about is that the charge was about $100 million lower than I thought then we have the tax rate impact and the accelerated buyback, which was probably more than I think you guys probably modeled in January. So with all that you could have almost $1 billion taken out of the net income the street had and still guide to $18. And I wanted to know on cash flow you said in the 10-K that you would grow cash flow by a $1 billion year-over-year and we just took out almost $1 billion of the net income versus where we were in January. So I actually don’t understand how we get to the free cash flow numbers previously guided in that, taking it now light if you can just explain it that way that will be really great? Thanks a lot?

Sure, so Ben just to clarify again we said at the beginning of the year we would grow free cash flow by $1 billion and we still feel that we will grow free cash flow by $1 billion given where we started the year. Again the year – the first quarter of the year is typically quite like in terms of free cash flow. So when we look at now when we look at the rest of the year in terms of free cash flow obviously we have a pretty substantial transactional business that picks up from first to second quarter and also sticks with us in the third and then the fourth is also a pretty substantial fourth quarter transactional flow which drives a lot of free cash flow for the year. So in the first quarter you are seeing a substantial impact for the in-quarter free cash flow numbers simply because of the size of the tax payments, the cash tax payments that we had to make in the first. Those do not replicate for the rest of the year. In terms of the $18 we have said we would get to at least we said we get to at least $18. We said in the first quarter that we would do about 14% of that and that’s really came in at 14%. Now, we said about $1 billion of restructuring plus or minus $100 million and that’s kind of where we came in. Now, we had fewer shares, so on EPS base the EPS impact was I think right in the middle of where we would have put the original number. And we did get everything done that we wanted to get done in terms of setting the right cost base. So I think that’s fairly constant. And then when we look at how the rest of the at least $18 rolls out. We had a big charge in our results in the second quarter of last year. And obviously we are not going to recreate that this year, so you are going to see big growth in the second quarter now given that quarterly phenomenon a charge in the first of this year, but none in the second versus the prior we would think that the first half then given that quarterly phenomenon that first half is going to look a lot like last year. And we will probably get about 38% of our full year EPS done by the end of the first half. And then when we look at the second half we will see kind of consistent growth with what need on a full year basis at 10.5. And given the transactional nature and the momentum in some of our businesses, we would say it probably will be a little bit faster in the fourth and in the third.

Thanks Ben. Let’s go to the next question please.

The next question comes from Lou Miscioscia with CLSA. You may ask your question.

Okay, thank you. Switching over to the services business you talked about it a little bit it seems like GBS did slowed down somewhat maybe consulting system integration was okay with growth rates comparing last quarter and this quarter, but maybe you can go into more detail of that the GBS Outsourcing business?

Sure, Los a couple of things GBS 2% growth it is slower quarter-to-quarter. As I mentioned earlier we saw a trajectory in the GMU that was – that went from high single to low single digit growth as an example. The bulk of the slowdown that we noted in the prepared remarks was in the application outsourcing business which was down year-to-year. Now, we have seen pretty substantial price pressure in that space. And as I noted in my prepared remarks clients are absolutely focused on cost take out projects and less focused and have decreasing volumes, but I would consider to be more elective kind of projects. So we are seeing a shift in focus. Now underneath that though that’s the revenue side, underneath that we do have a robust delivery platform that allows us to manage even in that environment and so from a GP perspective, gross profit perspective we are comfortable that we can continue to deliver profit even in that environment. So you are right as you saw in the data our GBS did slow quarter-to-quarter. We are not expecting that the environment changes dramatically. We are not counting on it to change dramatically. And we do have a pretty robust as I mentioned a pretty robust delivery platform underneath that. And then in total as you saw even with slower revenue growth our profits still grew 12% when you take out the charge. I think it’s important to take out the charge because we are going to earn it back during the year so that’s more indicative of the kind of growth we can still deliver even on low kind of profit growth we can deliver even on a lower revenue trajectory.

Thanks Lou. Can we go to the next question, please.

The next question comes from Joseph Foresi with Janney Montgomery Scott. You may ask your question.

Hi, I was wondering the growth market seem to be continuing or continuing to be a little bit slow for you. I know that most of your projects there are larger projects and perhaps more profitable than some of your other businesses. How do you plan to make that up in your plans going forward? And any color you can give on a return to steady growth, any of the services business or the aggregate business would be great?

Sure, Joe. So, a couple of things, growth markets as you know they were down 5 now. We have been experienced a pretty tough environment in the growth markets for a few quarters now and down 5 as I said earlier is not the kind of trajectory movement we are looking for in that business. Now, when you look at it by region, however, it’s not one that’s not a homogenous answer here. So, in Latin America, we had another good quarter of growth. The Latin America business for us is going really, really well. We are up 8% at constant currency. In the Mideast and in Central Europe, we are about flat. Now, that’s down from growth we have seen before, but about flat is at least hanging in. And our challenge areas have been in China, which was down double-digit and in Asia-Pacific, which was down in the mid single-digit. So, I think there are a blend here of issues. There are cyclical issues. There are secular issues. And they are not consistent between the regions. We have talked in the past about China needing time to return to growth. We have talked about across the growth markets that we still believe there is a very attractive region for us to invest in. So, we are going to maintain our investments, but there is both a mix of secular and cyclical. Now, we do have very heavier concentration in the growth markets in our STG business than in other parts of the world. And so while the growth markets are certainly impacted by the mainframe cycle like we are in other parts of the world that is not the bulk of the challenge in the GMU even though again STG is a bigger proponent. So, the STG business does – sorry, the GMU business does get impacted by this secular shift in our power business as an example. There is a very difficult price environment in our industry-standard x series business. And I noted earlier that even our GBS business from quarter-to-quarter slowed down a bit. So, mix of secular and cyclical issues some related to our own hardware issues, others related to what the countries themselves see in terms of economic environments, but not a single answer across the region.

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

The next question comes from Keith Bachman with Bank of Montreal. You may ask your question.

Hi, thank you. In addition, the software revenue, the constant currency growth was a little bit weaker than we were thinking. I was wondering if you could talk about what were the forces that impacted that? And more broadly, as you look at exiting the year on a constant currency basis and excluding dispositions, assuming the x86 business goes, do you think IBM can get to a position whereby revenue growth is flat on a constant currency basis? Thank you.

Sure, Keith. A couple of things. So, in software, we grow 2 points segment base as our key branded middleware was up 5. We would expect both of those to accelerate as we go through the year. We still see very good – we still see very good software opportunity for our solutions and we see very good software opportunity for the platforms that were building in fact within the key branded middleware you probably noted on our software chart that WebSphere grew 12%. That’s pretty healthy double-digit growth with our core software business. So, we do expect that to – we do expect that to accelerate as we go through the year. Operating systems, particularly power do impact that overall software business. Power operating – the AIX operating system is sold on as a one-time charge. So, as those hardware sales declined for the reasons we talked about that does impact the overall software segment growth. Now, I don’t think we are relying on. I am not relying on power to be coming back strongly, but one as it becomes a smaller part of the overall revenue stream, it has less of an impact. Then quite frankly, as I mentioned earlier, first quarter is our smallest transactional quarter. And so as we see improved transactional flow in the rest of the year, that impact to the overall software revenue growth will decline. In terms of overall revenue growth for the year, so I’d say a few things. One, we did have an impact from currency in the first quarter, which was about two points. And we do see that now being flat for the rest of the year. Now, interestingly at least I find it interesting, this is the first time since I think it’s 11 quarters, where we…

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

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

Yes. Martin, I am wondering if you could talk a little bit about the mainframe cycle and just remind us how often the mainframe at IBM is refreshed. You talked about it getting a little long in the tooth. It’s a bit of a drag. So how should we think about a refresh? And also power systems, how should we think about that in terms of improving the performance, I mean, you talked about some things I think on the January call, but where are we in improving that performance? Will we see it this year?

Okay. So a couple of things, Brian. I don’t think I said the mainframe was long in the tooth, I cannot imagine those words coming out of my mouth. So I think is as where we would expect six quarters into cycle, this is a very powerful platform for our clients. This drives a lot of value. And I would say we are right in line with where we would expect it to be and there are two, I’d say there are three metrics to look at when we look at where are we in the mainframe cycle. One, we do see – we do typically see this magnitude of a decline in revenue. So that is absolutely consistent. The other thing we see at this point of the cycle is an improving margin. And we saw that as well in the first quarter that margin continues to improve and should through the rest of the cycle. And then the other thing we look at is program to program MIPS growth. And we see as we have in prior cycles at this point, we see MIPS growth up about 26% relative to the previous cycle, so very good usage, very good usage of that platform in customer environment. So, the mainframe is as I said exactly where we would expect to be in the cycle. On the power side, power is as we said before power is in a bit of a secular – as a secular challenger, particularly at the low end. And we said that it OpenPOWER will will certainly help and we have a few new members that we announced in OpenPOWER in the quarter. Now, that is not going to have a profound impact on our power business in the year. So, I don’t think you…

Okay. Chris, can we please take one last question?

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

Thank you. Martin, sorry to revisit the cash flow question, but I am still confused about the reconciliation of free cash flow growth and your net income growth, it seems that your EPS guide for the year, if my math is right, implies flattish, maybe even down net income this year? And last quarter, I believe you indicated that some combination of operational performance and working capital improvements would help drive that $1 billion increase year-over-year despite the $2 billion headwind from cash taxes. So, I understand the working capital comment. I understand what happened in the first quarter. However, could you elaborate on the contribution from operational improvement given what appears to be flat to down net income in 2014?

Sure. Well, let’s deal with – let’s look at this I guess from a – I will try to do it from a pre-tax income flow and then we will talk obviously to that, then we would add the impact of taxes, which we know is a headwind later in the year and then our capital allocation policy and the EPS driven from share purchase. So, we did in the first quarter we had $3.3 billion of pre-tax income. That had a charge in it as we talked about $900 million. So – and I am going to use kind of big rounded numbers, it will be too hard to do this in million, so I will just billion. So, we have $3.3 billion, we had $900 million charge in that. So, on a base level, that gets us to about $4.2 billion of pre-tax income. Now, we have that for obviously as a starting point for three more quarters and I add back the billion in the charge we took, which we are going to earn back in savings and the $16 billion then goes to $17 billion. So let’s use $17 billion as a base in terms of starting, but starting from the first quarter. Now, I also noted that the first quarter is our lowest transactional skew. And that what we see as we go through the year is we had about $1 billion in profit growth from transactional business as well as overall volumes in the second through the fourth relative to what we did in the first. That was again was our starting point. So another $3 billion from that transactional growth as we go through the year. So, $17 billion as a base take the base of transactional growth that goes from first to…

So, let me wrap up the call. As I said in the beginning, we did get a lot done this quarter. We did transition more of our business into big data and analytics. We continue to move into the cloud. Our cloud platform is very powerful in the marketplace. Good growth in mobile and security. And we have our Investor Day coming up on May 14 and we are looking forward to sharing with everyone more about the capabilities and the investments we are making to drive those businesses. Thanks very much.

Okay. Chris, let me turn it back to you to close out the call.

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