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. Good afternoon, good evening, good morning, depending on where you are. This is Patricia Murphy, Vice President of Investor Relations for IBM. I’m here today with Martin Schroeter, IBM’s Senior Vice President and Chief Financial Officer. I’d like to welcome you to our fourth quarter earnings presentation. The prepared remarks will be available within a couple of hours, and a replay of the webcast will be posted by this time tomorrow. I’ll 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 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. So with that, I’ll turn the call over to Martin Schroeter.

Thanks Patricia. As is typical in January, I’ll start out with some top-level comments on the quarter and the year, discuss the details of the quarter, and then conclude with our view of 2017. In the fourth quarter, we delivered revenue of $21.8 billion, operating net income of $4.8 billion, and operating earnings per share of $5.01, which is up 3.5%. There are significant opportunities and shifts in our industry, and we believe that to be successful with enterprise clients, you need to bring together cognitive technologies on cloud platforms, that create industry-based solutions to solve real-world problems. So with that very brief context around our point of view, let me comment on what we achieved in the full-year of 2016. We made progress in building new businesses and creating new markets and continued to deliver strong results in our strategic imperatives. We invested at a high-level, and remixed our skills to address these new opportunity areas. We also continued to innovate in the businesses that we have traditionally provided to our clients. We returned capital to our shareholders and we achieved the earnings and free cash flow expectations we set last January, with $13.59 of operating earnings per share, and free cash flow of $11.6 billion, which is 97% of GAAP net income. So we did what we said we’d do, in a year not only with a lot of change in the industry, but also a year with a number of macro conditions and events, particularly in countries that are meaningful to our results. I’ll cover our expectations shortly, but right up front I’ll say that we are exiting 2016 in a stronger position than we entered it and that is reflected in our 2017 guidance. Looking at some of the highlights of the fourth quarter, we had…

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 on the quarter and the full year. And second, I’d ask you to refrain from multi-part questions. So let’s please open it up for questions.

Thank you we will now begin the question-and-answer session. [Operator Instructions] Our first question is from Katy Huberty with Morgan Stanley. Please go ahead with your question.

Thank you, good afternoon. Just quick clarification and then I have question. The clarification is just it would helpful if you gave a little more insight as to what you’re expecting in terms of the range of outcomes for the tax rate both normalized rate and how much discrete items could be in the year and then similar for IP income just because those were so significant in 2016? And then as it relates to my question which is on Watson, from the outside it seems this business gets pretty significant share of the press, but not contributing to revenue. Do you have visibility at as to when we should expect an inflection in revenue recognition from Watson, or should we just not think about this as a contributing factor or moving the needle in our models over the next couple of years?

Okay, thanks Katy. A couple of things, on tax when we look at, as I in the prepared remarks, we do see tax as a headwind year-to-year, but remember we had last year a $1 billion, we won a tax case in Japan, so over $1 billion, which was in last year. That drives, by the way the bulk of the year-to-year headwind. On a rate basis we finished this year we said 18 plus or minus 2, and we finished kind of at the bottom end of that range for the full year on an operating base obviously with on all in base with that Japan benefit from the first quarter and there it’s much lower, but we finished at the bottom end of that range. When we look at 2017, as I said in the prepared remarks all the scenarios point to a headwind. We’re right now thinking it’s about 15 plus or minus 3, and the reason we widened the range is because we are getting ready for tax reform here in the U.S. We don’t know yet what that looks like, we read the same things you do, but we are going to start now to prepare for tax reform, so we’ve widened the range this year to 15 plus or minus 3. That doesn’t have discretes in it. On IP income as we said a number times we are trying to rebuild that base of business, it’s always been part of our income stream, it is a business where we’ve now had fair bit of success in rebuilding it and while we’re not relying on a big growth year-to-year, we do have in that particular line. A lot of this is already done quite frankly because we have these agreements in place that pay us…

Thanks Katy let’s go to the next question please.

Thank you. Our next question is from Wamsi Mohan with Bank of America Merrill Lynch. Your line is now open.

Yes, thank you. Martin, your free cash flow conversion of 90% plus in 2017 leads to about $10.2 billion at least in free cash flow, which is substantially down year-on-year. Can you help bridge the puts and takes here or what are the largest moving pieces to that conversion rate…

No, I mean. Thanks, Wamsi. I guess the way I look at free cash flow conversion. As you know we guide on a conversion metric. But we see free cash flow basically flat year-to-year in 2017, not down. Now again, we give a range and that’s consistent with the model we have of being north of 90%, 90% to 100%. But we see free cash flow for the year to be flat. Now within that, as you know again we got our money back from Japan last year when we won our tax case so we’ve got that as a headwind. And within that and we’ll overcome that with the rest of the operations. But the other side of this is, we also holding if you will an ability to grow our capital investments within that flat as well. So it was not I mean you shouldn’t interpret that 90% is down, we see free cash flow flat with a tax headwind which will overcome and room to grow CapEx.

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

Next question is from Amit Daryanani with RBC Capital Markets. You may ask your question.

Thanks a lot. Good afternoon guys. I guess my question broadly and we give this a fair amount is IBM’s gross margin profile over the last several quarters. Especially across the cognitive segment specifically, but broadly has degraded pretty consistently. I realize you guys have a lot of investments but also is it organic but just talk about when do you think gross margins start to stabilize. And at what point do you think at least on the cognitive side the acts as-a-service business start to become more in line to the cognitive segment margin profile.

Yes, thanks. Okay, sure. So on cognitive solutions, its been a year that you really have to go back to understand where we finished in the fourth. And I’m going to talk specifically about the fourth in a moment but you have to go back to what we’ve been talking about within cognitive solutions all year. So in the first quarter we saw the steepest year-to-year decline in margins, driven by a heavily by our investments – heavily by our need to remix our skills. And also by we had acquisitions and while currency was a big headwind in dollars for us last year was also an impact to our margin. So as we progressed through the year when we get the fourth. On a gross profit margin basis we were down about three points which I would put in currency and acquisitions is all of that three. And so on a PTI margin basis in the fourth we were down about less about half, little bit less than half about 1.4 points. And within that again currency and acquisitions drove three points so everything else in cognitive solutions within the PTI margin. The mix of the annuity business the ramp of our as-a-service business, the benefit we get from our licensing our IP and the offsetting royalties that are coming. And everything else improved operating PTI margin in the fourth quarter. And so what you saw in 2016 in cognitive segment margins on PTI was an operating margin that went up pretty dramatically as we went quarter-to-quarter like 17 points, right from first all the way to fourth. And next year, I don’t know when currency is going to ramp but we do know it’s much less of a headwind next year than it was this year at least at current rates. And we also know that we ramp on the acquisitions. So those things that have dragged us dragged our margins down are starting to go away and while gross profit. We don’t see that I don’t see that deteriorating by three points like it did in the fourth anymore. And in fact PTI margins I think are much, much more stable going forward, which is what we’re assuming. Now they don’t have to be flat, we’re still going to drive our as-a-service performance we are going to continue to drive these IP deals, which throw a little bit of royalty into the GP stream but I see a much improved cognitive segment PTI margin from what we experienced in the fourth. And again you saw in the fourth we ramped on our heavy investment levels here as well.

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

Thank you. Our next question is from Tien-tsin Huang with JPMorgan. Your line is now open.

Thank you so much. Just wanted to – I guess better understand this global financing change and what’s driving that. Are you increasing your leverage to support clients and anything needs in 2017 or is it just a tool to lie [ph] to increase your debt overall leverage and efficiencies just want to better understand that.

Sure. Thanks Tien-tsin. So there are some really important benefits here as we align kind of the legal and the capital structure of our financing business that just by itself will drive pretty substantial operational benefits. It gives us better capital structure flexibility in each of the countries in which IGF operates. IGF by the way doesn’t operate in 172 like all of IBM does its more like 45 but it allows for better capital structure in that more limited set of countries in which they operate. It gives us better efficiency of cash allocation. So what – we are really doing here as we are taking the interest earning part of IGF, the client financing and the commercial financing, we put those into a subsidiary. We will provide – be providing more information externally. So you can see everyone can see what the capacity for them to borrow and that’s really the borrowing capacity of IGF the remarketing business does not support a borrowing capacity its a very high margin, it’s a very high return but the interest bearing portion of IGF is really what supports the debt. And so we’re going to issue debt directly out of that entity. It’ll allow us to add $600 million or so of debt because that portfolio was high enough quality that it can run at higher leverage. That’s by the way more consistent with what we see in other entities of this nature. So we’ll run it slightly higher leverage that will improve the ROE, that will free up basically some equity if you will that we have in IGF it will free up some equity in mainline. But it’s not a change to necessary to the overall debt levels it’s really a change to IGF and its efficiency the operational benefits we get and our ability then to pull a little bit of capital out of idea. But also manage it better in which in the countries in which it operates. But again importantly the segment that you see won’t change. So this really is a change in how we access the capital markets externally.

Thanks Tien-tsin. Sam, can we take the next question, please?

Thank you. Next question is from Toni Sacconaghi with Bernstein. Please go ahead with your question.

Yes, thank you. Martin if I think about 2016 in total relative to your guidance at the beginning of the year it benefited about $1.20 in EPS from IP gains and lower tax rate not including the Japanese tax settlement. So on a fundamental basis, earnings went from about $14.02 in 2015 to about $12.50 in 2016. So as we look to 2017, you’re guiding for an improvement in earnings from $13.50 to $13.80. And you said tax is going to be a headwind, you’ve said IP income is not going to help if anything it might hurt. So the last three years you’ve actually had fundamental erosion if we take out tax and IP in your business. And you’re calling for an inflection point in 2017. So I’m wondering if you can talk through what are the key things that drive that improvement and perhaps you could also be explicit about what your expectation for acquisitions and their contribution for restructuring expense and whether that will be a net, we’ll have any net impact on results and what your assumption is for cash tax versus accrue tax in 2017 as well? Thank you.

Okay, sure. Thanks Toni. So a couple of things when we entered 2016 as I said earlier on a prior question, we said tax would be 18 plus or minus two and we came in again at the bottom of the range. And so now when we look at tax, yes, we had $1 billion improvement from Japan, which we are not – obviously we’re not going to win another tax case in Japan by the way. But we do have discrete this year. When we look at where we finished, we finished at the bottom of that range. And as I said with us going into now 2015 into 2017 at a 15 rate plus or minus three we have to overcome if you will the headwind from the Japan. But we’re going to as we plan for tax reform we don’t see a fundamentally different operating tax picture than we saw last year in our I&E. We saw an inflection point it’s probably you know maybe that’s the right way to think about it. We saw an inflection point in intellectual property income this year. And I can tell you that yes, we see an inflection point in profitability our PTI we expect to improve that’s embedded within our earnings. So we saw an inflection point in IP income but then you get to the engineer and you want to take it all out. So that we hit an inflection point in IP last year, we did better than we had the prior year. And it’s always been a part of our model and again we see while it may not continue exactly we’re not relying on all of that for the year. We will have IP income a substantial amount of IP income as we always have…

Thank you. Can we go to the next question?

Thank you. Our next question is from Lou Miscioscia with CLSA. Your line is now open.

Okay, great. Thank you. You maybe go into more detail in GBS like the last quarter you had said that over 50% of the revenue has transitioned into the digital practice area and that was growing in double-digits. So looking at this quarter obviously it seems like it’s fallen back a little bit, many others are growing application management just if you can help us out what’s going on under the coverage there why it seems that which should have improved in – obviously it didn’t and what you think about that going forward.

Sure. Thanks, Lou. So the dynamics in GBS were similar to what we talked about in prior quarters we said a couple of things. One we are continuing to remix their skills and while we have a good performance in our strategic imperatives and that those digitized offerings. We still do have a pretty large book of business that’s in our part of the marketplace that has very heavy price pressure as all of us are competing to get kind of that foothold if you will or competing for certain kinds of opportunities and some of these accounts. So we’ve got price pressure in parts of the business and again we’re remixing our skills which as we said will have an impact the shorter term impact on productivity. Now shorter term we invest in businesses for a long, long periods of time. So I don’t define shorter term is every 90 days. Although this business this business should start to improve when we – as we’ve talked about last time when we see a couple of things. So the backlog in GBS is down and so our first focus has to be to take the skills we’re building and get a good signings, a good consistent signings performance in order to grow the backlog once you grow the backlog then obviously you deliver in an efficient and effective way. And you start to improve your margins and we still view GBS is being able to get that done in fact. We’d say we will grow signings in the first quarter this year. So maybe we’ll start that position now but we still see this business and these skills at such a key differentiator in the marketplace that. We’re unwilling if you will to reduce our capacity or our capabilities in the marketplace. We really this is the third leg if you will between cognitive and a robust cloud. Industry skills are going to – what brings it all together so GBS is in a similar dynamic. I do think will grow signings in the first which will be the start to having that business improve. But it’s going to take a little while longer to get through these same dynamics, our remixing skills and moving our skills away from these heavily priced pressured opportunities.

Thank you, Lou. Sam, can we please take the next question?

Thank you. Next question is from Brian White with Drexel Hamilton. You may ask your question.

Hey, Martin. So it sounds like the PTI margin will expand in the 2017, maybe just look at gross margins. You think gross margins will expand and if you can just give us a view on – the major business segments where should we expect improvement in the PTI margin in 2017? Thanks.

Sure. Thanks Brian. So a couple of things, we have is as we always, do we have a bunch of scenarios on how a year might fold out, roll out, right. So I would say that as you pointed out PTI margin expansion is in every scenario. That’s evidenced by the fact that profit is growing, it’s implied to grow with the tax headwind and then EPS obviously with a little bit of growth. So PTI margin growth is in each of the scenarios. GP margin is not necessarily required for us to grow PTI margin and that’s for a couple. Now I’m not saying that peak that GP is necessarily going to go down but we can maintain our GP margins, we can even erode a little bit if we want to accelerate our move into as-a-service even faster. As you saw we had very good growth in our – as-a-service business in the fourth. Overall those margins are below our IBM margin, so there’s a little bit of margin pressure as you make that shift, but we can deliver 2017 push as-a-service margins it’s really hard either maintain or you can even contract GP margins a little bit and still grow PTI margins given that we’ve ramped on, again this heavy level of investment and we’ve gotten a lot done on structure both the overall IBM structure, the infrastructure of what runs IBM, as well as each of the business have taken another good look at structure. So from a segment perspective we saw good performance in our global technology services business. When you look at the infrastructure services piece growth and margins for the full year and I’d say that we can see opportunity to continue to grow margins there. The technical support services, the TSS business is where the margin pressure was in 2016, but I think we have a way to stabilize that margin performance, a very much is a mix shift from as we drive the multi vendor services business in TSS. So margin improvements in the infrastructure services business I see relatively flat profit margins and systems. Now we’re coming off of a high point in the mainframe. At the end of the cycle margins tend to be higher. As you go into a new cycle they tend to be a little bit lower. But we also have an opportunity to improve in the other businesses. So systems margins relatively flat and we see again an opportunity to improve margins in GBS. As we get some of the work that I’ve described they are done and get kind of the power to shift through the way, we can see improvements in GBS. And I talked earlier about cognitive solutions, so I won’t cover that again. So again PTI we do see growing. GP not necessarily, we don’t need GP to grow in order to produce PTI margin growth.

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

Thank you. Next question is from Steve Milunovich with UBS. Your line is now open.

Thank you very much. Martin, I think you talked about $2 billion of savings from the workforce rebalancing and so forth a year ago. I was curious how much of that did you see last year, how much of it is going to be seen in 2017, and how much of that in 2017 May you take to the bottom line because that strikes me, that’s a big part of this PTI improvements. And also just wanted to ask and you might want to actually respond to this that where are you in the innings in your transformation. It’s been a number of years now. How far into it are you? And then just qualitatively what surprised you positively and what’s been very difficult to change in terms of changing IBM.

Okay. Well, that’s a lot there Steve. So first on the workforce rebalancing savings, we said for last year, for 2016 that we would see a bit more than $500 million and we absolutely got that. And we said we would free up then $2 billion of total spend, some of which will get reinvested, some of which will go to the bottom line. You saw from our view of 2017 now that we’ve ramped, we’re not obviously reinvesting all of that although we ramped on our higher levels of spending, so obviously some of that’s going to wind up in the profit. And with mid single-digit profit growth it’s a fair bit drives that profit growth in 2017. In the innings, you know what, IBM is always transforming. So I don’t know how to pick an inning other than to say that we have established a few years ago, we established this idea that the strategic imperatives were the path for revenue growth to resume and those continue to grow quite well. Then last year we changed the segment structure and said, look, we’re going to now report not only more detail on the strategic imperatives, but we’re going to talk to you about cognitive solutions which has all the Watson content. We’re going to talk to you about a cloud platform business and we’re going to talk to you obviously about the industry dimension. And so that part of the transformation continuous and I don’t think that that transformation of IBM ever ends quite frankly. We are back now as we put in our guidance; we are back to our model level of pre-tax income growth as we have in our model right now. Now if you say that pre-tax income growth – if for the model – achieving the model is the definition of when the transformation is done, then I’d say that we see that this year for pre-tax income. Now we’ve got a lot of other elements of our financial model as well. We’ve been returning cash to our shareholders consistently, we have generated our free cash flow as a percentage of our net income has been on model. So we’ve had a number of elements that are on model. Pre-tax income growth I think is a good one that says this structure, the strategy is working and it will drive the financial model we set out to achieve, at least on the pre-tax income growth which had been missing.

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

Thank you. Our next question is from Joe Foresi with Cantor Fitzgerald. Your line is now open.

Hi, I thought I’d ask that progress question a little bit differently. Can you give us some thoughts on your expectations for growth in the strategic imperatives and the decline in the core business in 2017? Thanks.

Sure Joe. So, we said a few years ago that strategic imperatives would be $40 billion and 40% by 2018 and as you just saw we finished 2016 when they’re 41%. So obviously we made the mix piece of this early. But from here if we grow, say, 10% to 11% we get to 40% by 2018. And so with such a substantial part now of our business at $30 billion plus with such a substantial part of our business to grow that at that continued double-digit says that we have the right offerings in the right spaces with the right skills to deliver them and they are robust powerful solutions. And so we see that kind of growth in order to get to the 40%. We still think we’re quite confident; we’re ahead actually of track, but we’re quite confident in getting to the 40% still. The core business or the rest of the business if you will is always has a few components in it. One, at our very core, remember, that we are delivering productivity to our clients, and so they use that that productivity that we deliver to reinvest. And as we said before that’s the dynamic you see in our revenue stream. We deliver productivity through parts of our business and they reinvest and that’s how you get the revenue dynamic that we have. The core was down double-digit two years ago and down 9% in the fourth, if you do the math roughly down 9%. And when we get into this year, I’d say that we’ll see a kind of a similar dynamic but that’s what we are – that’s what is sort of embedded within our guidance for 2017. So continued good performance in strategic imperatives, continued focus on delivering productivity for our clients and we’ll have that revenue dynamic into 2017.

Thanks Sam. Why don’t we take one last question?

Certainly. Our last question is from David Grossman with Stifel. Your line is open.

Thanks. Actually Martin if I could just ask two questions really quickly. One is just into your last answer. So if you are growing at 11% in the strategic and you are pretty close to 50-50, I think you’re at 44% in the fourth quarter and the core is declining 9%. I mean wouldn’t that imply that we’re reasonably close to getting to a crossover on the top line.

Did you want to ask your second question first, or do you want me to answer that one?

Well, the second – Why do you answer that first and then I will go to the second one.

Okay. So when you say we were down on a constant currency basis, we were down 70 basis points in the fourth. So I think we are reasonably close in the third. Yes, this is the structure we are in. And we are focused on driving value in those strategic imperatives not just grabbing a little bit of revenue to have some math work out differently. And our margins in the strategic imperatives continue to be higher than overall IBM and higher obviously than the core, so our focus on delivering value hasn’t changed. And whenever that crossover point happens to be, yes, we’re already close. So when you say wouldn’t it imply, yes, we’re close, we were close in the fourth. But we’re focused on delivering value, and for 2017 we’re focused on obviously PTI margin expansion.

Right. And the second piece is, if historical trend repeats itself, you’re due for a mainframe product cycle in the back half of the year. I believe the way you break it out at least some of that mainframe revenue is in strategic imperatives. So that said how should we be thinking of the potential financial impact of the next mainframe cycle vis-a-vis prior cycles, particularly given some of the secular shifts that you’ve talked about in your prepared remarks and in response to some of the other question?

Sure. So, yes, I mean, we – if you follow a mainframe cycle then it would say sometime late this year we’d have another mainframe. But again, we wouldn’t see the impact of that until late in the year. What drives the mainframe as it always has is our ability to make it relevant to the workloads that our clients need. So when we were together when we announced the last mainframe, and two years ago we talked a lot about this shift to mobile. We talked a lot about security. We talked within those two elements and there’s a lot more to it. But within those two elements we talked about how the mainframe was built particularly with those two kinds of workloads in mind and that drove the growth we saw in the mainframe through the cycle. That’s still by the way part of the growth we see in the mainframe and it’s still why – that’s why big enterprises continue to put their most important work on mainframes. Now the set of workloads that are going to drive the next incantation of the mainframe are going to be things like Blockchain, and so all of that is still ahead of us. We added and we said in the prepared remarks, we added a number of new clients throughout the cycle but we added more again in the fourth quarter as well. And while I haven’t talked to every one of them, I think what they’re thinking, what many of them are thinking is yes, I need mobile, and yes, security is more important than ever, but I also need to be ready for the next workload drivers. And Blockchain is a good example of a workload driver that is ideally suited for the most robust enterprise platform there is. So I think that if I had to pick just one that drives the mainframe is Blockchain. It would be my first top of my list for what drives the next mainframe cycle. So let me wrap up the call by saying again that we’re really pleased with the progress we made in 2016 and how we’re positioned for 2017. Of course there’s plenty for us to work on, we’re not confused by that. But we are looking forward to continuing this dialogue at our investor briefing later in the quarter. So with that, thank you for joining the call.

Sam, can I have you close up the call please?

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