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 point. Now, I would like to 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’m here today with Martin Schroeter, IBM’s Senior Vice President and Chief Financial Officer. I’d like to welcome you to our First 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 Web site, 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. In the first quarter, we delivered over $18 billion of revenue, operating pretax income of $2.1 billion and operating earnings per share of $2.38, which is up year to year. This is in line with the view we provided back in January and keeps us on track to our full year expectations for earnings per share and free cash flow. In the first quarter, we continued to deliver strong performance in our strategic imperative with revenue up 13% at constant currency. As is typical, I'll focus on constant currency growth rates throughout. Our Cloud offerings were up 35% this quarter; led by cloud as a service, which was up over 60%; Analytic, the largest of our strategic areas, was up 7%; Mobile was up over 20%; and Security up 10%. We also continued to deliver core capabilities to our clients running mission critical systems and processes. Many of these products provide the foundation of hybrid environments, enabling our clients to get more value from there on premise data and applications. Some of these key franchises are growing like WebSphere, while others are declining as they are in declining markets. But all are high value. We’ve been very clear that to be successful with enterprise clients and to solve real problems, you need to bring together cognitive solutions on cloud platforms and create industry specific solutions. And so we’ve been focused on building a cognitive and cloud platform, and massing the best industry skills and capabilities, all while maintaining our focus on delivering higher value solutions. As part of the transformation, we’ve made significant investments and shifted resources. This level of investment and a longer return profile of the cloud of the service businesses are reflected in our margins. Our foundation is now solidly in place. And while the…

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 deck that provide additional information on the quarter. 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 Wamsi Mohan with Bank of America Merrill Lynch. You may proceed with your question.

Martin, as we look at this quarter on a year-on-year basis we saw PTI dollar improvement of close to about $700 million, should we expect any more PTI improvement over the course of this year, given that the discrete tax benefit was 500 million, you can pretty much guess your guidance from those two elements, not sure if there is more discreet items yet to come, but conceptually is there are more PTI benefit yet to come or have you seen the PTI benefit already flow through? Thank you.

Yes, thanks Wamsi. The first thing I’ll say is I apologies for my voice, so if I sound kind of crocking -- I got a bit of a cold here. But hopefully you can understand. So with regard to what we see from here out, as you noted we got about 700 in our guidance on a full year basis, we did about 700 in the first, the thing I would add is that we don’t know what that mix is going to be, it's 15 plus or minus two points. So if you were to take that range, we either have another couple hundred to go if it comes in from a high tax area or we're already over solved by few hundred. So either way, you are in about that right range. Now we have a lot of work underway to drive productivity in our services business, we talked a bit about that in the prepared remarks, we still expect to get the growth out of the acquisitions that we spend some money on. So there is a lot more obviously within the dynamics of our business from here to the end of the year. But if you just wanted to look at those two line items, then yes either we have a little bit left to go, if it comes in at a higher tax mix, so we've over solved already, but yes that’s the -- what the guidance implied.

Thank you. Our next question is from Katy Huberty with Morgan Stanley. You may ask your question.

At the Analyst Day, you talked about as you scale the cloud business, as you scale the cognitive initiative that we should start to expect margin stability and even inflection. You also talked -- essentially guided to GBS margin improvement for the full year. And when you step back and look at gross margins which is more of the clean read on your profitability not into the insight work pressure [ph] balancing and IP income, those declines accelerated this quarter in all of those businesses. So the question is, do you still expect that we can start to see stability and even inflection in any of those businesses this year or is that further out?

So couple of things, when we look at -- we pretty much look at every year, one quarter is the low point in GP margin that always true. And then we build sequentially from there, I think what I would expect this year in that build sequentially, I do expect as we said in prepared remarks, I do expect the services units to start to drive sequential improvement in that business. Now some have longer to go, more progress to make if you will, as we noted GBS with the declining revenue and the impact of margins, we also -- we believe that a business that can grow, pass the growth is what we described, which is consistent signings growth, we will get the backlog growth which will drive revenue growth. So all of that we still think we have ahead of us, we did get signing growth in the first quarter, it's 2%, but we got signing growth and so we will continue to build that business back. And then in GBS specifically, the margins in the new strategic imperative work, the margins in the areas that that business is moving to remain better than the margins in the places they're coming from. So yes, we have to realize the productivity at the overall model level, but we are seeing margin opportunities in those new areas in GBS and we would expect to continue to make progress, but again in total the margin picture on a sequential basis as we always do will grow from first to second, third and fourth as well, and depending on the mix of business that growth that we typically see from first to fourth, could be three, four points higher and it's been as high as 10 points in some years. We'll be within that range some place by the time we get out of the fourth, but the first quarter is always the low point in the year.

Our next question is from Steve Milunovich with UBS. You may ask your question.

Martin, you talked about the investments that the company has been making the last few years and previously suggested a little more flexibility this year, could you talk about in dollars, are the investments that you're making into the strategic imperatives flattening out? Should we look for less growth year-over-year in those investments, are they actually becoming flat and is there a point in the next couple of years where we could even see them decline year-over-year to help your margins?

So, couple of things, one, when we said we would expect -- when the tip of the bow of the ship gets through the wave, that was a year-to-year statement, and so now with those acquisitions for instance in our run rate, the dollar level is at an elevated amount and so the year-on-year impact is diminished if you will. Now, all of those businesses need continued investment and for IBM, what it's always been about for us is shift as much as it is adding to that pie. So I think the adding to the pie now is behind us, if you will, and the shift will continue. So we'll continue to invest heavily in the strategic imperative, but it won't represent the same growth that what we've -- as what we've seen in the past now that they're in our model.

Thank you. Our next question is from Toni Sacconaghi with Bernstein. Your line is open.

I just wanted to confirm and clarify how you're getting to your full year '13 AB [ph] target. So for Q2, I think given that you expect 37% of EPS in the first half that would point to EPS of about $2.73, I think consensus is $3.17. So well below Street expectations. Which means that you have to be well above Street expectation for the second half. I'm wondering if you can also clarify what you're assuming on IP licensing for the year. It was up dramatically in the first quarter, I think you said it would be about flat year-over-year. So that implies the rest of the year IP licensing is going to be declining and therefore a year-over-year headwind, is that the right way we should think about it, and if you're IP licensing or your discrete tax benefits are significantly higher than you think today, will you be adjusting your guidance accordingly?

So, a couple of things Toni, one we're not adjusting our guidance, we've reaffirmed that we see an at least $13.80 number for the year, and we also see free cash flow flat, roughly flat as we said. So same guidance as we talked about in January and quite frankly from my perspective the quarter played out you know pretty much as we expected, other than we thought we had a couple of more signings relationships in services that we could have gotten done, but by and large the quarter played out as we expected and we maintained our guidance. In the prepared remarks Tony, we started to put together some of the things that we know and some of the things that we expect and I think that framework is kind of how I think about it. Now as you know we have a lot of scenarios around guidance and what might happen, but let's go through a couple of the things that we mentioned in the prepared remarks. First, you know the systems product announcements have kind of a double impact. One you have to ramp investment ahead of the revenue in order to get that system ready. That's the period we're in now and we'll be in it through the first half. Once we get the systems announced and out the door then we start getting revenue and you get the double benefit you get GP dollars and you get lower spending in order to because you don't have to ramp any more. So that has a pretty profound impact on the first to second half. We also talked about getting the acquisitions further embedded. Now we do a lot of acquisitions, there's obviously opportunities to drive investment in those but we also have a lot of…

Thank you, next question is from Ingin Wang with JPMorgan, your line is open.

Just one on the tech services side, it sounds like some delays in deals closing. Is that a macro-cyclical issue in terms of maybe a slow start to the year for some of your enterprise clients? What's the visibility into these deals closing in GPS and also the improvement in GBS that you just mentioned, is that also required improvement in macro environment, or is there something else that's driving that [Multiple Speakers]?

Sure. So thanks, Ingin. These no macro, so I’ll talk about GBS specifically. And quite well, the nature of the work we do with our clients, we are running the hearts and lungs of our client's businesses. And so obviously, when you run hearts and lungs, you’re not running toward 90-day schedule. There is nobody by the way that’s in the room with you other than the client, nobody has the breadth of the capability that we have. So our clients move at a pace that reflect the important of the work we do. And at the same time add into that the steps required for instance regulatory approval, we’ve got a lot of [technical difficulty] customers, there are a lot of customers in regulated industry. And so the signings delays were not at all macro driven, this is our -- these are deep, deep partnerships with our clients that require careful planning, careful execution and they’re not going to move on a 90-day cycle. In GBS, again, I don’t think, we need an improved macro environment for GBS. In fact, one could argue that GBS will do better when clients are more focused on how to move to the future and more focused on or put under more pressure, if you will. The transformation that GBS is going through is driven by their ability to rescale in the new areas and we put -- we've poured a lot of people into GBS focused on these new practices that we have. The results that we see as the teams move into those new practices are very positive. So no, this is not at all macro, on GBS it is again, because the relationships with these clients are so vital to how their organizations run and are never going to move on a 90-day calendar. And GBS I think is demonstrating now that as it moves into the future, it can do even better.

Thank you. Next question is from Jim Schneider with Goldman Sachs. Your line is open.

Just wanted to follow-up on the earlier services question and maybe ask about the commentary you made about couple of clients, order clients taking work in-house. Is that a commentary on the infrastructure and cloud piece of the business specifically, or is that a broader comment on the application services and like? And can we maybe just kind of talk about what you seeing terms of pricing pressure in the market, because you previously called that out several times, but didn’t this time? Thank you.

Yes, sure. So there is -- I wouldn’t say there is anything macro. In the two instances that we mentioned about people bringing -- companies bringing this in-house, very unique circumstances. And I think when I describe it, which I will, I think you will agree that they are sort of unique. So for instance, we have a client in Germany, it was renewed -- it was a five-year deal renewed for another five years and there is a rule, there is a law in Germany that this particular type of client cannot renew the same contract twice, just can't. And so they had to bring it back in-house due to regulatory reason. We will still -- they took the people, by the way, they were all in structure that allowed them to take the people back. They still run their IBM mainframes. So we’re still partners with them on the infrastructure that they run. But that’s a highly unique, I am not making on macro statement. And in the other case, again highly unique to the client situation, they had a plan in their industry to split two businesses and so they were heading down the path of having two businesses with two infrastructures. We have them by the way, both of them and then the market if you will, they made a judgment based on the market that they were just going to take one of those businesses and sort of wind it down. So they just had no need, if you will, to have a big infrastructure around that particular business. So very unique, not at all what I would call a macro. And then on pricing pressure, the nature of these relationships, again, as I mentioned earlier, these are substantial relationships that are running very core of what these companies need. And if I had to -- I guess these are complex, but if I had to simplify it, they're asking us to move them into -- in the future to move into cloud, to give them the agility and the security and the mobility that they see their competitors have. So there is -- there are not -- there is nobody in the room with us when we go in for those calls. And if they want to purse that path and as I think there is -- that suits their business model, then they're talking to us and we'll make those deals happen, but it's not a macro statement, its very much about our ability to deliver the future to them and whether or not that suits the way they're thinking their business at that particular time.

Thank you, next question is from Amit Daryanani with RBC. You may ask your question.

I guess Martin, I just want to go back to the gross margin discussion and perhaps more at the corporate level, I realize that these margins will improve from Q1 to Q4. At what point I guess do you see gross margin starting to stabilize, the year-over-year declines start to abate for the company? And if you were to think about the cost saving benefits, what cost saving benefits that you have expected for 2017?

Sure Amit, a couple of things. One, we are seeing the savings if you will of what we were able to start to transform last year and the actions we took. Now remember at the time we talked about Q1 '16. So a year ago we talked about how there was some -- some measure of that was to reduce capacity and a lot of that, by the way, that capacity reduction was to get our teams back together into collocated offices, where they could operate in more agile environment and it was to reduce the number of sites, if you will, which we had people and couldn’t collaborate properly. So there were some measure with the reduced capacity, but the bulk of what we wanted to do is to revitalize skills, as we always do. We're always revitalizing our skills. So we see the benefit of that in the new skill mix that we have, we see the benefit of that for instance in GBS growing signings in the first quarter. Now there is productivity that we see in the SG&A line, because while we are investing more for development our SG&A spending is down. And that was again not only the reduced capacity, but it's us being more efficient at how we operate. From a gross profit margin perspective, we are a high -- we have a high value model as you know. And so one of the things we are always looking at is, are the places we are going to still more valuable and higher margin than the places we are coming from and the strategic imperatives as we've talked about it in the past have a higher margin profile than the core if you will. That shouldn’t surprise anyone, I think that’s why our investors expect us to invest into those new areas, as opposed to just going to chase some lower margin content. And we still see that now, it's been true since we have been talking about the strategic imperatives and it remains true that the margins in those areas continue to be higher. So I think that I still view the opportunity for us and gross margin is going to look -- gets better because again the places we're moving to is better than what we're coming from.

Thank you. Our next question is from David Grossman with Stifel Financial. You may ask your question.

Martin, if you look over the next 12 to 24 months I think the strategic imperative were in the low 40, the percentage of revenue. What are the main variables that dictate whether the imperative grow to over 50% of revenue and again to more than compensate for the decline in the legacy core.

Sure David, so few things first and we talked about this a little bit in the prepared remarks and I think it's important, the legacy core is a business that we're confidently reinventing, it's not something that we are under investing, it's not something that we don’t like, we really like this business, it is very high value and some of that content sure fits in declining market. So it has declining opportunity, but that’s high value. And then, as we talked about in that prepared remarks, some of those businesses like Webster application server is growing, it's in a growing market and we grow. So the core is -- and I know you didn’t say it this way, but the core is -- I just want to make sure everyone's clear, is made up of lot of different things. And included in that core, if you will, is -- we've got part of our power business, we got some of our mainframe business, we're just not in the time of the cycle for the core part -- for those parts of the core to grow. We will get to that part of the cycle when it grows. So then from the high-level math you did, we said that strategic imperatives would be 40%, we're obviously there, but 40 billion at least by 2018 and we're still on track to get there, in fact we're a little bit ahead of track. Now when those two lines cross, I don’t know, I think that the investment community has been keen for us to stay on that solid double digit growth path and the strategic imperatives, there have been concerns every quarter about whether or not we're flowing down, but we just grew 13% on our toughest compare of the year last year because we did '17 in the first. So I think that the cross over point, I think is a mathematical exercise, what I'm looking that is, are the strategic imperatives and the growth we're getting out of those continuing to put us and keep us on the track to that 40 billion.

Thank you. Next question is from Keith Bachman with BMO. Your line is open.

I wanted to ask you, is pruning still on the table? What I mean by that is, if I think about the revenue growth the core actually decelerated this core compared to say the last three quarters. And if I look at some of the areas like GBS you have application maintenance that’s combined with BPO that’s over a 50% of the business and well under company profit levels. And I'm just trying to understand specifically focused on GBS, is how you improve revenue growth, but should you improve revenue growth or is there more pruning that you can do as it relates to the total IBM portfolio, but particularly within GBS.

Sure Keith, so I think, I look at our portfolio and as you know we talked about this and we have been pretty clear that, we look at our portfolio through the eyes of value. And I think the portfolio, not solely through the eyes of growth, value and -- no value or a limited value without growth is obvious that we wouldn’t -- we would have a -- we would be thinking about whether or not that fits. But the portfolio we have today, I view as high value. The AMS business as you pointed out, it's a high value business. Now the revenue is pretty stable, but it serves a really important need with our client base, it allows us based on how we do it with our industry focus, it allows us to drive value for our client. So I think of pruning is something you do when you don’t see an opportunity for differentiation, when you don’t see a longer term opportunity for value, and I look at the portfolio now and I think there is -- I think we have a very high value portfolio and I think that GBS, large GBS, all of it plays a critical rolled in that, I don’t see a pruning opportunity here.

Thank you. Our last question is from Jim Suva with Citi. Your line is open.

I think there is no question about the success in the strategic imperatives, how you are ramping those. The biggest question on many of the follow up calls, well maybe I'll give it one more shot, [indiscernible], the investment you are putting forth in the degradation to gross margins, when are we going to see them stabilized or do you have line of sight to that? It just seems like when you give up an invest, at some point, you want to progress the fruits of those efforts and it went out time and time again, so I’ll ask kind of one more time, do you see stabilization, and if so, when?

Yes, sure Jim. So again -- and you know this is actually, it's an interesting question because -- it's an interesting timing of this question because I want to make sure that everybody understands that as we head now into the rest of this year and one of our focus item as it's always has been, but now the timing is right, is to get the returns for our investments. It's something if you were to pull 100 IBM executives, it's something that they would all say is, now it's time to get the returns. So we have driven very heavy investments that has impacted our margins. But the investment is not the only opportunity, only lever we have to improve margins, we have a lot of opportunity in our services business and in our delivery model and how we drive margin. So yes it is time for us to get the returns we have invested quite heavily. The strategy is right, we hear it from our clients every day, the places that we are moving them to and the work we do in the core is highly, highly valuable to them. So I think now, the short hand in that is yes, now it's time. And with that I’ll wrap up the call by saying, we have been making significant investments and now we've added, by the way, a ton of capabilities to the IBM company. We started new businesses, we made new markets, we've changed, as we always do, industries and professions and we'll continue to do that. But now it's with the business positioned very well for the long term, in terms of capabilities. Always opportunity to add a little bit here or there, but with the business positioned well for the long term, now it is time to focus on improving the returns on those investments. So thank you very much for joining the call today.

And Sam, I’ll turn it back to you to close the call please.

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