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’ll turn the meeting over to Ms. Patricia Murphy with IBM. 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 Third Quarter Earnings Presentation. The prepared remarks will be available within a couple of hours, and a replay of this 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. In the third quarter, we delivered $19.2 billion of revenue, operating pre-tax income of $3.6 billion, and operating earnings per share of $3.30. Our revenue trajectory improved, and revenue was roughly flat year-to-year. This includes a modest benefit from currency, and so we were down 1% at constant currency, which is two points better than last quarter’s growth rate. Our gross and pre-tax margins again improved sequentially, and we again had good free cash flow performance. With this performance, we continue to expect at least $13.80 of operating EPS for 2017, and free cash flow consistent with last year. From a geographic perspective, our trajectory improvement was broad-based, and from a segment perspective, we had significant improvement in Cognitive Solutions and in Systems. Cognitive Solutions grew year-to-year, led by security, IoT, and our analytics and cognitive offerings, as well as growth in our Transaction Processing Software. So broad-based improvement across Cognitive. In Systems, we had strong growth driven by the third consecutive quarter of growth in storage, and a solid launch of our new z14 mainframe, which was available for the last two weeks of the quarter. And in services, the revenue performance in both Global Business Services and Technology Services and Cloud Platforms was very similar to the second at constant currency. We had good signings performance this quarter, which were up year-to-year in both segments, including strong double-digit growth in GTS signings. Across our segments, our strategic imperatives revenue was up 11%, or 10% at constant currency, with strong double-digit growth in cloud and security. While there’s not much difference between our constant currency and reported revenue rates this quarter, I’ll continue to focus on constant currency growth rates throughout. The revenue performance in the quarter is pretty much all organic. Revenue from our strategic imperatives…

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 second, as always, I’d ask you to refrain from multi-part questions. So, operator, let’s please open it up for questions.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] And our first question is coming from the line of Ms. Katy Huberty from Morgan Stanley. Your line is open.

Yes, thank you. Good afternoon. Martin, you made nice progress on gross margin in the quarter, but a lot of that did come in the back of the z14 product cycle. Do you see a path to year-on-year gross margin expansion at some point over the next year? And do you think that you can achieve that even as the mainframe contributions flows in a couple of quarters? Thank you.

Sure, thanks. Thanks, Katy. So a couple of things. One, while the mainframe improved a bit of the mix, it’s also software mix that helped in the quarter. So I wouldn’t attribute it all the mainframe. And as you know, and as we’ve been talking about, we’ve been focused on the productivity in our services business. So there are multiple contributors coming out of the third, which will also drive in the fourth some improvement. So what we said in the – in our prepared remarks is, we have a range. At the low-end of the range, we’d say a very similar kind of a trajectory that we saw in the – year-to-year trajectory saw in the third. But at the high end of the range, we would show some more and improved trajectory, if you will, relative to the year-to-year. Now as we go into next year, we’ll talk more about 2018. Obviously, in January, when we can see what kind of momentum we have in our software business, we can see what kind of signings momentum we have to drive our services platform. But our model, as you know, is to grow margins. We’re not talking about 100 or 150 basis points. Our model is to grow 30, 40, 50 basis points of margins. And I would say that, we are going to get there in the next year.

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

Thank you. Our next question is coming from the line of Mr. Amit Daryanani from RBC Capital Markets. Your line is now open.

Thanks a lot. Good afternoon, guys. I guess, Martin, nice to see some positive growth in Cognitive Solutions. Could you just help us understand what is enabling the growth over there? And you – as you think about December quarter and potentially beyond that, how sustainable do you think this growth is you go forward?

Sure, thanks. Thanks, Amit. So a couple of things on the historical side. We saw good growth, pretty broad-based growth in the solution software categories. And that includes obviously our analytics business. It includes our security business, and we’ve got good double-digit growth across many industries, including health and FSS, and our Watson Health and FSS categories as well. So pretty good broad-based improvement in solutions software. As you know, also within that segment is our transaction processing software business, which was also up in the quarter. So good execution in the quarter. As we go into fourth now, we’re not relying on growth coming out of that TPS part of that business. Now that business, it’s important for us to make sure we maintain high renewal rates in our S&S categories, for instance, which we have that drives then this kind of strong transactional performance, but we’re not relying on that to continue. We do expect given that our solutions software business has attracted a lot of investment. I think that that team is positioned itself pretty well to continue to see growth going into the fourth.

Thanks, Amit. Let’s go to the next question please.

Thank you. Our next question is coming from Toni Sacconaghi from Bernstein. Go ahead, please.

Yes, thank you. You obviously had a very positive contribution from the mainframe on the system side. But I was wondering if you could maybe help us understand how the mainframe might be – might have helped financial results in the quarter more broadly? I think historically, at your Analyst Day, you said that 45% of mainframe revenue was actually strategic imperatives, and you commented about how transaction processing software was – a lot of it was mainframe-related. So to that end, maybe you can tell us what strategic imperative growth would have been ex mainframe in the quarter? And also for Cognitive Solutions, how we would think about growth ex software that runs in the mainframe in the quarter? With the intention of really trying to understand given that mainframe cycles are pretty cyclical, how much of the growth that you’re seeing in strategic imperatives and cognitive was aided by mainframe in the quarter? Thank you.

Sure. Tony, I’ll – I think I got it all and I’ll try to address some kind of piece by piece. So from a mainframe perspective and we’ve talked about this in the past, the hardware part of the cycle is quite profound. And we spent – we spend a lot of time explaining what we expect to see on the hardware side. The software side is not as tied to a cycle. The software side has obviously tied to the platform, but the cycle for software does not coincide or is tied in any way to the hardware cycle. And then the other part of the business that I would say – two other parts of the business that I think are important, on the maintenance side, the maintenance business is impacted by the hardware cycle because of the warranty period that kicks in with new mainframes. Now the bulk of that hasn’t obviously happened yet, because we’re only two weeks in here at the end of the quarter. So no tie real – no real tie on software. Maintenance gets impacted. The other benefit – the other business that benefits from the mainframe cycle is our Global Financing business. And most, I think all – nearly all mainframes are financed through Global Financing, certainly 90% or so attach rate in that business. So that will help the volumes, but given that the business itself probably had the volume before it maintains its position as opposed to grows the asset base dramatically. So GF volumes will improve in the quarter. With regard to the strategic imperatives and we’ve talked a lot about how 12 months or trailing 12-month period is a right way to look at it, given that we in the cycle for the hardware side have been – our strategic imperatives growth has been held back, if you will, by the mainframe cycle, obviously was helped a bit – has helped a little bit in the third. But on a trailing 12-month basis now, the mainframe really has become a neutral with regard to the strategic imperatives, really no impact to the growth rate on a trailing 12-month period. So ex mainframe trailing 12 months strategic imperatives are the exact same number. Now they’ll contribute a bit as they become – when we get to the biggest quarter in the fourth, but on a trailing 12-month basis no impact.

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

Thank you. Our next question is coming from the line of Mr. David Grossman from Stifel Financial. Your line is now open.

Thank you. So, Martin, I know it’s been a while since you’ve had an FX tailwind and that there are several factors related to currency that can impact margins. However, are there any tools or historical reference points that you can provide that, A, help us better understand how currency tailwind may impact the margins over the next 12 months?

Sure. Sure, David. So well, first, I’d like to thank you for pointing out that we have had a pretty dramatic headwind. In fact, I think from the time I’ve been in this job now, this is my 15th call. I think I’ve only had one other call where it was a small tailwind. And this was a small tailwind as well in the quarter, and hopefully, we’ve wrapped on some of the big, more profound effect. When we look at a dramatic impact like what happened in 2015 and the strengthening of the dollar from a cash perspective that cost us just on the translation, if you will, of translating all that cash back to U.S. dollars. It was like $2 billion impact. Now we hedge our cash flows, and so that helps defer the impact, if you will. But when you have a dramatic move like that, the impact is still more than $1 billion from a cash perspective. Now the margin impact is a little bit different. And depending on the broad-based nature of a dollar move, it will be anywhere from a small positive to a small negative. But the real impact again is the absolutes in terms of what it’s doing to profit and what it’s doing to cash.

Great. Thanks, David. Jay, can we please take the next question?

Thank you. Our next question is coming from the line of Wamsi Mohan from Merrill Lynch. Your line is now open.

Yes, thank you. Martin, it’s good to see the improved revenue trajectory on a constant currency organic basis here. Can you address what is driving the 35% growth cloud within GBS specifically? And given that strategic revenues in GBS are greater than 60% of overall segment. Is it the pricing issues you noted earlier that is causing this gross margin rate still to be down year-on-year basis? And can you just confirm that the strategic imperatives gross margins are actually higher than segment average for GBS? Thank you.

Sure, Wamsi, no problems, we’ll talk about each of those pieces. Maybe I’ll start from the most recent, not just because I remember that one the best, but because you just said it. But – so first, from a strategic imperative margin perspective, our margins in strategic imperatives, this is across IBM remain higher than the margins in outside, if you will, the strategic imperative revenue streams. And as we’ve always said, that’s a good indication that the future is obviously better than the past. Now that has a couple of elements to it. In the case of the IBM – broad IBM businesses, some of that’s driven by mix, because we have a better software content in those strategic imperatives than we do in the core. In the case of GBS, it is actually that the pricing is – we’re better able to differentiate and capture the pricing, if you will, in those strategic imperative areas. So when you think about the design studios we’ve built around the world and you think about how we bring skills to help our clients transform their digital interactions with their clients, that is – it’s important work clients value it highly. And when you have good skills and global capabilities, you can earn good returns. The GBS team, I think has positioned themselves pretty well for getting the benefit, if you will, of that shift and moving more and more into their strategic imperatives. And our work says that the margins are in fact higher as they move into those new areas. There is still though we still have some labor focused on some of these older areas that are less differentiated. And as we noted in our prepared remarks, those see margin pressure, and this is a competitive industry. So it’s not only competitive where there is less differentiation, we’re not confused by the competition in even in the newer areas. So we know we have to keep moving our teams and rescaling and making sure that we are at the forefront of those new areas. But those older areas are also very competitive and a lot of our competitors would look at those as kind of access points where they haven’t developed yet the most robust skills, they look at those as access points to get into our clients. So we’re still experiencing that phenomena.

Thanks, Wamsi. Can we please take the next question?

Thank you. Our next question is coming from Steve Milunovich from UBS. Your line is now open.

Great. Thank you. Martin, I wanted to touch on your tax situation. I think you’ve got $4 billion plus of tax credits and NOLs remaining. So it feels like you could see number of discretes over time and perhaps see a tax rate consistently below 15% even if it’s not always predictable. How do you think about that? And how much cash impact is there with these tax credits and NOLs going forward?

Sure, Steve, so a few things. On the rate itself, we’re at, as we said, 15. And from a – from the way we’ve been thinking about it and talking about how it’s embedded in our guidance, we’re at 15 plus or minus three ex discrete, and that’s been consistent since we started the year now, we just came out of the third quarter when and quite frankly kind of a rare 90-day period when you do business in 162 countries, we had no discrete tax events, so somewhat rare. But it’s – it is what it is. We can either predict nor necessarily predict the magnitude or the timing of discrete events by their very nature. Now we do take, as you know, which causes the $4 billion or so of deferred tax liabilities or assets. so we do take a pretty conservative view on how we book – how we run a book against our tax. And that’s what creates these discrete tax events, which by and large for us tend to be – tend to come back into the income statement as opposed to finding that something is going to fall out, because discreet, let’s face it, discretes can go either way. They can be helps or hurts. For us, by and large, because we’re pretty conservative. They’re – they tend to be helps. We don’t know in terms of what’s going to happen in the fourth quarter, again, the 90-day period went through a somewhat rare and we don’t know if and we don’t know when and we don’t know how much they might be. But yes, we do our principle of how conservative we are has not changed. And therefore, I would expect that the discretes will be more credits than debits, but it was a, again a kind of a unique period. So we’ll see where we go through the fourth from a rate perspective, as we mentioned in our prepared remarks, the three – the plus or minus 3 points is the right way to think about it, given the discussions going on around tax reform. And then obviously, we don’t know, we have assumptions about the mix of the business, but the assumptions change particularly when you’re in the big – you’re in the biggest part of the year, and then we’ll see what happens as the – as we go through the quarter on discretes.

Okay. Thanks, Steve. Jay, can we please take the next question?

Thank you. Our next question is coming from Mr. Jim Suva from Citigroup. Your line is now open.

Thank you very much. Martin, the press and reviews of your new mainframe have been very positive and impressive. Is there the view that within IBM and externally that the demand for this product could be take us out of the slow and steady decline that mainframes have been doing? Is it that good of a product, or how should we kind of think about it as far as the mainframe cycle, which typically last kind of three to four years?

Yes. So a couple of things, Jim. So first, this new mainframe and the mainframe’s always redesigned, rebuilt for the most contemporary workloads. This new mainframe addresses what is probably top of mind in every board discussion. It is top of mind for every CEO and it’s top of mind for the whole C-suite, which is the problem of cybersecurity. So it addresses it in a way that nobody else can address it and it’s been, as we said very well received by the marketplace. Now, the mainframe was reinvented in the last instantiation to address mobile and cloud and analytics. And before that it was reinvented to address the performance and the capacity needs to help our clients optimize their own data center. So we’ve gone through we – as we always do, we go through a process by which we work with our clients to address how we can make sure that the mainframe retains their most important workloads and included in that discussion is bringing new workloads onto it, and we’ve done some of that, we had new clients. So, the long-term outlook for the mainframe and the model for the mainframe is to be a very stable business, very high value and one that’s going to obviously be cyclical on the hardware side because of the cycle. But we actually see given how we’ve reinvented it this time that and the teams are working on this to try to figure out, yes, we’re not just talking about new workloads, which we obviously have within our existing clients, there are not too many businesses out there. In fact, you’d be hard pressed to find one that isn’t – that doesn’t have workloads that can be – can benefit from being rewritten and run on the mainframe, given the capabilities it has. Now that is not a process that’s going to sort itself out in two weeks. Things that run in an x86 environment, things that run on other platforms have to be reworked. They have to come into the mainframe platform. We’ve got a terrific group of developers and lab services that help the teams do that not only for existing clients, but can do it for new clients as well. So given the problems this mainframe solves, I do think that there is an opportunity for us to further expand the market by further expanding the kind of workloads and the relevance that it plays in new environments.

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

Thank you. Our next question is coming from James Schneider from Goldman Sachs. Your line is now open.

Good afternoon and thanks for taking my question. Martin, it’s good to see that the services signings were up 25%, excuse me, at least the GTS signings up 25%. Can you maybe give us some sense about given the customer specific issues, whether you see growth – a return to growth in GTS for next year? And can you maybe comment on the kind of bookings trends you’re seeing in the GBS in particular?

Sure. Thanks, James, so a couple of things. The team did in the – in GTS, they did a nice job in delivering pretty good signings growth. Now this is a big backlog of business and they’ve managed in the infrastructure services side to get that backlog back to be flat for the now coming out of the quarter. And they – when they look at their opportunity pool, they see a pretty good quarter in terms of signings. All of that’s going to determine whether or not we see how quickly they come back to growth in 2018 and we’ll talk more about that in January. Within that, I think it’s important to note that the reason they’ve been successful not only in the most recent quarter, but over the long-term the reason that backlog is holding up so well and we would expect it to get back to growth with a strong signings execution is, because they are doing the most contemporary work for our clients. They are taking our clients and new clients into the kinds of cloud environments that they want. So they’re being successful, because they are moving to the future not because they’re doing the same things that they’ve always been doing for clients. And I think the GTS team has done a nice job again in third quarter and executing some large deals, but their value proposition is as robust as it ever has been. On the GBS side, we did see growth again in the signings in the quarter. It was only 2%, which was a slowdown from where we’ve been. But three quarters of growth now and what that’s been able to do for the GBS team is get that consulting backlog back to growth in the quarter. And the team has been very focused on delivering high-value to our clients and rebuilding the skills in that consulting base in order to do that. So the consulting backlog being up is certainly a good starting point, but the backlog in total is still down. And so as we’ve said in the past, consistent signings growth will get to backlog growth, which will get the revenue growth. And I still think they’re on that path, although we are going to have to accelerate from the low single-digit signings in order to make that go faster. So they position themselves well in the fourth to have a lot of opportunities to try to close. We’ll see how the fourth quarter goes for GBS as well, and that too like GTS will determine how we enter 2018.

Great. Thanks, Jim. Jay, can we please take the next question?

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

Thanks. Hi, Martin and Patricia. Just I’ll ask on the transactional software side. So pretty good performance there in the third quarter. Do you feel good about that carrying into the fourth quarter, given the demand environment, as you see it today? I think you said that you’re not counting on transactional revenue in the fourth quarter. Does that mean we could see upside potential if 3Q trends persist? Just want to clarify that.

Sure, Tien-tsin. So, what you heard was a fair reflection of what we’re counting on, which is, we’re not counting on continued strong growth in parts of that portfolio things like transaction processing software. But make no mistake, the team is working on driving transactional performance in parts of that business, which quite frankly, we have a pretty hot hand in. We have got a hot hand in security. We’ve got a hot hand in some of the IoT space. So we will continue to see good growth in parts of the business. And then for software in total, our as-a-services business continues to grow quite well, and we would expect to continue to see the as-a-service performance continue to grow. As-a-service in total was up to $9.4 billion run rate when we exited, and that’s pretty good sequential improvement from where we were in the second and we’ll – we would expect that the fourth will also drive some growth. But again, the – we’re not relying on the TPS part of the business necessarily to grow. But our customer engagement business, our security business, these are businesses that have drawn a lot of investment and they’ve got a hot hand and they’ll continue to perform.

Thanks, Tien-tsin. Jay, can we please take one last question?

Thank you. Our last question is coming from Keith Bachman from Bank of Montreal. Your line is now open.

Hi, thank you very much. Martin, I also want to revisit on GBS, if I could. And the results relative to the rest of the businesses are still demonstrating challenges both on top line and on the margin profile. And the context of the question is, as you mentioned, application management is still experiencing challenge and all participants in the industry seem to be echoing the same thing. So if application management continues to experience challenges, what are the conditions that allows GBS to improve? and in particular, as you look at FY 2018, is it – well, how should we be thinking about expectations if we just isolate on the margin profile? If application management continues to experience those challenges, is it reasonable to assume that margins could flatten out? But any comments there on- broadly on the role of ADM within the context of GBS?

Sure. I mean, for us, this business is all about helping our client – helping our clients move to the cloud. So where we’re helping clients implement cloud-centric architectures, we’re moving them to next-gen apps like Salesforce and Workday and we’ve built terrific skills. We’ve even acquired skills to help accelerate this. There is plenty of room for us to both differentiate to get growth and to have good margin performance. So in those areas which are – we’re more able to differentiate, I think there is a good future there, and that’s what the team is focused on. And then in the other parts of the business, as I mentioned, the other parts of that business where it’s more difficult to differentiate and where others who haven’t built the kind of skill base that we have are trying to get inroads, then there’s some price pressure, but that’s not the future. The future for us is helping our clients move to those cloud-centric architectures and the cloud – the next-gen apps, which is what the team is positioned themselves well to continue to do not only in the fourth, but going into 2018.

So let me wrap up the call and first, by saying thanks for joining us today. As we said at the start of the year and then we reiterated again in July, we said we see improved trajectories in the second half of the year relative to the first half then we talked about the drivers of that change. Our third quarter performance certainly reinforced that. And while we have more to get done in the fourth, it shows we’re on the right course. And it also shows quite frankly, that our confidence in our strategy is very well placed. So thanks again for joining us today and we’ll talk to you in January.

Thanks, Jay. Can I turn it back to you please to close out the call?

Thank you for participating in today’s call. The conference has now ended. You may disconnect at this time. Thank you. Title: International Business Machines (IBM) Q3 2017 Results - Earnings Call Transcript Symbol: IBM Call Start: 17:00 Call End: 17:57 International Business Machines Corporation (IBM) Q3 2017 Earnings Conference Call October 17, 2017 5:00 PM ET

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’ll turn the meeting over to Ms. Patricia Murphy with IBM. 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 Third Quarter Earnings Presentation. The prepared remarks will be available within a couple of hours, and a replay of this 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. In the third quarter, we delivered $19.2 billion of revenue, operating pre-tax income of $3.6 billion, and operating earnings per share of $3.30. Our revenue trajectory improved, and revenue was roughly flat year-to-year. This includes a modest benefit from currency, and so we were down 1% at constant currency, which is two points better than last quarter’s growth rate. Our gross and pre-tax margins again improved sequentially, and we again had good free cash flow performance. With this performance, we continue to expect at least $13.80 of operating EPS for 2017, and free cash flow consistent with last year. From a geographic perspective, our trajectory improvement was broad-based, and from a segment perspective, we had significant improvement in Cognitive Solutions and in Systems. Cognitive Solutions grew year-to-year, led by security, IoT, and our analytics and cognitive offerings, as well as growth in our Transaction Processing Software. So broad-based improvement across Cognitive. In Systems, we had strong growth driven by the third consecutive quarter of growth in storage, and a solid launch of our new z14 mainframe, which was available for the last two weeks of the quarter. And in services, the revenue performance in both Global Business Services and Technology Services and Cloud Platforms was very similar to the second at constant currency. We had good signings performance this quarter, which were up year-to-year in both segments, including strong double-digit growth in GTS signings. Across our segments, our strategic imperatives revenue was up 11%, or 10% at constant currency, with strong double-digit growth in cloud and security. While there’s not much difference between our constant currency and reported revenue rates this quarter, I’ll continue to focus on constant currency growth rates throughout. The revenue performance in the quarter is pretty much all organic. Revenue from our strategic imperatives…

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 second, as always, I’d ask you to refrain from multi-part questions. So, operator, let’s please open it up for questions.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] And our first question is coming from the line of Ms. Katy Huberty from Morgan Stanley. Your line is open.

Yes, thank you. Good afternoon. Martin, you made nice progress on gross margin in the quarter, but a lot of that did come in the back of the z14 product cycle. Do you see a path to year-on-year gross margin expansion at some point over the next year? And do you think that you can achieve that even as the mainframe contributions flows in a couple of quarters? Thank you.

Sure, thanks. Thanks, Katy. So a couple of things. One, while the mainframe improved a bit of the mix, it’s also software mix that helped in the quarter. So I wouldn’t attribute it all the mainframe. And as you know, and as we’ve been talking about, we’ve been focused on the productivity in our services business. So there are multiple contributors coming out of the third, which will also drive in the fourth some improvement. So what we said in the – in our prepared remarks is, we have a range. At the low-end of the range, we’d say a very similar kind of a trajectory that we saw in the – year-to-year trajectory saw in the third. But at the high end of the range, we would show some more and improved trajectory, if you will, relative to the year-to-year. Now as we go into next year, we’ll talk more about 2018. Obviously, in January, when we can see what kind of momentum we have in our software business, we can see what kind of signings momentum we have to drive our services platform. But our model, as you know, is to grow margins. We’re not talking about 100 or 150 basis points. Our model is to grow 30, 40, 50 basis points of margins. And I would say that, we are going to get there in the next year.

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

Thank you. Our next question is coming from the line of Mr. Amit Daryanani from RBC Capital Markets. Your line is now open.

Thanks a lot. Good afternoon, guys. I guess, Martin, nice to see some positive growth in Cognitive Solutions. Could you just help us understand what is enabling the growth over there? And you – as you think about December quarter and potentially beyond that, how sustainable do you think this growth is you go forward?

Sure, thanks. Thanks, Amit. So a couple of things on the historical side. We saw good growth, pretty broad-based growth in the solution software categories. And that includes obviously our analytics business. It includes our security business, and we’ve got good double-digit growth across many industries, including health and FSS, and our Watson Health and FSS categories as well. So pretty good broad-based improvement in solutions software. As you know, also within that segment is our transaction processing software business, which was also up in the quarter. So good execution in the quarter. As we go into fourth now, we’re not relying on growth coming out of that TPS part of that business. Now that business, it’s important for us to make sure we maintain high renewal rates in our S&S categories, for instance, which we have that drives then this kind of strong transactional performance, but we’re not relying on that to continue. We do expect given that our solutions software business has attracted a lot of investment. I think that that team is positioned itself pretty well to continue to see growth going into the fourth.

Thanks, Amit. Let’s go to the next question please.

Thank you. Our next question is coming from Toni Sacconaghi from Bernstein. Go ahead, please.

Yes, thank you. You obviously had a very positive contribution from the mainframe on the system side. But I was wondering if you could maybe help us understand how the mainframe might be – might have helped financial results in the quarter more broadly? I think historically, at your Analyst Day, you said that 45% of mainframe revenue was actually strategic imperatives, and you commented about how transaction processing software was – a lot of it was mainframe-related. So to that end, maybe you can tell us what strategic imperative growth would have been ex mainframe in the quarter? And also for Cognitive Solutions, how we would think about growth ex software that runs in the mainframe in the quarter? With the intention of really trying to understand given that mainframe cycles are pretty cyclical, how much of the growth that you’re seeing in strategic imperatives and cognitive was aided by mainframe in the quarter? Thank you.

Sure. Tony, I’ll – I think I got it all and I’ll try to address some kind of piece by piece. So from a mainframe perspective and we’ve talked about this in the past, the hardware part of the cycle is quite profound. And we spent – we spend a lot of time explaining what we expect to see on the hardware side. The software side is not as tied to a cycle. The software side has obviously tied to the platform, but the cycle for software does not coincide or is tied in any way to the hardware cycle. And then the other part of the business that I would say – two other parts of the business that I think are important, on the maintenance side, the maintenance business is impacted by the hardware cycle because of the warranty period that kicks in with new mainframes. Now the bulk of that hasn’t obviously happened yet, because we’re only two weeks in here at the end of the quarter. So no tie real – no real tie on software. Maintenance gets impacted. The other benefit – the other business that benefits from the mainframe cycle is our Global Financing business. And most, I think all – nearly all mainframes are financed through Global Financing, certainly 90% or so attach rate in that business. So that will help the volumes, but given that the business itself probably had the volume before it maintains its position as opposed to grows the asset base dramatically. So GF volumes will improve in the quarter. With regard to the strategic imperatives and we’ve talked a lot about how 12 months or trailing 12-month period is a right way to look at it, given that we in the cycle for the hardware side have been – our strategic imperatives growth has been held back, if you will, by the mainframe cycle, obviously was helped a bit – has helped a little bit in the third. But on a trailing 12-month basis now, the mainframe really has become a neutral with regard to the strategic imperatives, really no impact to the growth rate on a trailing 12-month period. So ex mainframe trailing 12 months strategic imperatives are the exact same number. Now they’ll contribute a bit as they become – when we get to the biggest quarter in the fourth, but on a trailing 12-month basis no impact.

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

Thank you. Our next question is coming from the line of Mr. David Grossman from Stifel Financial. Your line is now open.

Thank you. So, Martin, I know it’s been a while since you’ve had an FX tailwind and that there are several factors related to currency that can impact margins. However, are there any tools or historical reference points that you can provide that, A, help us better understand how currency tailwind may impact the margins over the next 12 months?

Sure. Sure, David. So well, first, I’d like to thank you for pointing out that we have had a pretty dramatic headwind. In fact, I think from the time I’ve been in this job now, this is my 15th call. I think I’ve only had one other call where it was a small tailwind. And this was a small tailwind as well in the quarter, and hopefully, we’ve wrapped on some of the big, more profound effect. When we look at a dramatic impact like what happened in 2015 and the strengthening of the dollar from a cash perspective that cost us just on the translation, if you will, of translating all that cash back to U.S. dollars. It was like $2 billion impact. Now we hedge our cash flows, and so that helps defer the impact, if you will. But when you have a dramatic move like that, the impact is still more than $1 billion from a cash perspective. Now the margin impact is a little bit different. And depending on the broad-based nature of a dollar move, it will be anywhere from a small positive to a small negative. But the real impact again is the absolutes in terms of what it’s doing to profit and what it’s doing to cash.

Great. Thanks, David. Jay, can we please take the next question?

Thank you. Our next question is coming from the line of Wamsi Mohan from Merrill Lynch. Your line is now open.

Yes, thank you. Martin, it’s good to see the improved revenue trajectory on a constant currency organic basis here. Can you address what is driving the 35% growth cloud within GBS specifically? And given that strategic revenues in GBS are greater than 60% of overall segment. Is it the pricing issues you noted earlier that is causing this gross margin rate still to be down year-on-year basis? And can you just confirm that the strategic imperatives gross margins are actually higher than segment average for GBS? Thank you.

Sure, Wamsi, no problems, we’ll talk about each of those pieces. Maybe I’ll start from the most recent, not just because I remember that one the best, but because you just said it. But – so first, from a strategic imperative margin perspective, our margins in strategic imperatives, this is across IBM remain higher than the margins in outside, if you will, the strategic imperative revenue streams. And as we’ve always said, that’s a good indication that the future is obviously better than the past. Now that has a couple of elements to it. In the case of the IBM – broad IBM businesses, some of that’s driven by mix, because we have a better software content in those strategic imperatives than we do in the core. In the case of GBS, it is actually that the pricing is – we’re better able to differentiate and capture the pricing, if you will, in those strategic imperative areas. So when you think about the design studios we’ve built around the world and you think about how we bring skills to help our clients transform their digital interactions with their clients, that is – it’s important work clients value it highly. And when you have good skills and global capabilities, you can earn good returns. The GBS team, I think has positioned themselves pretty well for getting the benefit, if you will, of that shift and moving more and more into their strategic imperatives. And our work says that the margins are in fact higher as they move into those new areas. There is still though we still have some labor focused on some of these older areas that are less differentiated. And as we noted in our prepared remarks, those see margin pressure, and this is a competitive industry. So it’s not only competitive where there is less differentiation, we’re not confused by the competition in even in the newer areas. So we know we have to keep moving our teams and rescaling and making sure that we are at the forefront of those new areas. But those older areas are also very competitive and a lot of our competitors would look at those as kind of access points where they haven’t developed yet the most robust skills, they look at those as access points to get into our clients. So we’re still experiencing that phenomena.

Thanks, Wamsi. Can we please take the next question?

Thank you. Our next question is coming from Steve Milunovich from UBS. Your line is now open.

Great. Thank you. Martin, I wanted to touch on your tax situation. I think you’ve got $4 billion plus of tax credits and NOLs remaining. So it feels like you could see number of discretes over time and perhaps see a tax rate consistently below 15% even if it’s not always predictable. How do you think about that? And how much cash impact is there with these tax credits and NOLs going forward?

Sure, Steve, so a few things. On the rate itself, we’re at, as we said, 15. And from a – from the way we’ve been thinking about it and talking about how it’s embedded in our guidance, we’re at 15 plus or minus three ex discrete, and that’s been consistent since we started the year now, we just came out of the third quarter when and quite frankly kind of a rare 90-day period when you do business in 162 countries, we had no discrete tax events, so somewhat rare. But it’s – it is what it is. We can either predict nor necessarily predict the magnitude or the timing of discrete events by their very nature. Now we do take, as you know, which causes the $4 billion or so of deferred tax liabilities or assets. so we do take a pretty conservative view on how we book – how we run a book against our tax. And that’s what creates these discrete tax events, which by and large for us tend to be – tend to come back into the income statement as opposed to finding that something is going to fall out, because discreet, let’s face it, discretes can go either way. They can be helps or hurts. For us, by and large, because we’re pretty conservative. They’re – they tend to be helps. We don’t know in terms of what’s going to happen in the fourth quarter, again, the 90-day period went through a somewhat rare and we don’t know if and we don’t know when and we don’t know how much they might be. But yes, we do our principle of how conservative we are has not changed. And therefore, I would expect that the discretes will be more credits than debits, but it was a, again a kind of a unique period. So we’ll see where we go through the fourth from a rate perspective, as we mentioned in our prepared remarks, the three – the plus or minus 3 points is the right way to think about it, given the discussions going on around tax reform. And then obviously, we don’t know, we have assumptions about the mix of the business, but the assumptions change particularly when you’re in the big – you’re in the biggest part of the year, and then we’ll see what happens as the – as we go through the quarter on discretes.

Okay. Thanks, Steve. Jay, can we please take the next question?

Thank you. Our next question is coming from Mr. Jim Suva from Citigroup. Your line is now open.

Thank you very much. Martin, the press and reviews of your new mainframe have been very positive and impressive. Is there the view that within IBM and externally that the demand for this product could be take us out of the slow and steady decline that mainframes have been doing? Is it that good of a product, or how should we kind of think about it as far as the mainframe cycle, which typically last kind of three to four years?

Yes. So a couple of things, Jim. So first, this new mainframe and the mainframe’s always redesigned, rebuilt for the most contemporary workloads. This new mainframe addresses what is probably top of mind in every board discussion. It is top of mind for every CEO and it’s top of mind for the whole C-suite, which is the problem of cybersecurity. So it addresses it in a way that nobody else can address it and it’s been, as we said very well received by the marketplace. Now, the mainframe was reinvented in the last instantiation to address mobile and cloud and analytics. And before that it was reinvented to address the performance and the capacity needs to help our clients optimize their own data center. So we’ve gone through we – as we always do, we go through a process by which we work with our clients to address how we can make sure that the mainframe retains their most important workloads and included in that discussion is bringing new workloads onto it, and we’ve done some of that, we had new clients. So, the long-term outlook for the mainframe and the model for the mainframe is to be a very stable business, very high value and one that’s going to obviously be cyclical on the hardware side because of the cycle. But we actually see given how we’ve reinvented it this time that and the teams are working on this to try to figure out, yes, we’re not just talking about new workloads, which we obviously have within our existing clients, there are not too many businesses out there. In fact, you’d be hard pressed to find one that isn’t – that doesn’t have workloads that can be – can benefit from being rewritten and run on the mainframe, given the capabilities it has. Now that is not a process that’s going to sort itself out in two weeks. Things that run in an x86 environment, things that run on other platforms have to be reworked. They have to come into the mainframe platform. We’ve got a terrific group of developers and lab services that help the teams do that not only for existing clients, but can do it for new clients as well. So given the problems this mainframe solves, I do think that there is an opportunity for us to further expand the market by further expanding the kind of workloads and the relevance that it plays in new environments.

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

Thank you. Our next question is coming from James Schneider from Goldman Sachs. Your line is now open.

Good afternoon and thanks for taking my question. Martin, it’s good to see that the services signings were up 25%, excuse me, at least the GTS signings up 25%. Can you maybe give us some sense about given the customer specific issues, whether you see growth – a return to growth in GTS for next year? And can you maybe comment on the kind of bookings trends you’re seeing in the GBS in particular?

Sure. Thanks, James, so a couple of things. The team did in the – in GTS, they did a nice job in delivering pretty good signings growth. Now this is a big backlog of business and they’ve managed in the infrastructure services side to get that backlog back to be flat for the now coming out of the quarter. And they – when they look at their opportunity pool, they see a pretty good quarter in terms of signings. All of that’s going to determine whether or not we see how quickly they come back to growth in 2018 and we’ll talk more about that in January. Within that, I think it’s important to note that the reason they’ve been successful not only in the most recent quarter, but over the long-term the reason that backlog is holding up so well and we would expect it to get back to growth with a strong signings execution is, because they are doing the most contemporary work for our clients. They are taking our clients and new clients into the kinds of cloud environments that they want. So they’re being successful, because they are moving to the future not because they’re doing the same things that they’ve always been doing for clients. And I think the GTS team has done a nice job again in third quarter and executing some large deals, but their value proposition is as robust as it ever has been. On the GBS side, we did see growth again in the signings in the quarter. It was only 2%, which was a slowdown from where we’ve been. But three quarters of growth now and what that’s been able to do for the GBS team is get that consulting backlog back to growth in the quarter. And the team has been very focused on delivering high-value to our clients and rebuilding the skills in that consulting base in order to do that. So the consulting backlog being up is certainly a good starting point, but the backlog in total is still down. And so as we’ve said in the past, consistent signings growth will get to backlog growth, which will get the revenue growth. And I still think they’re on that path, although we are going to have to accelerate from the low single-digit signings in order to make that go faster. So they position themselves well in the fourth to have a lot of opportunities to try to close. We’ll see how the fourth quarter goes for GBS as well, and that too like GTS will determine how we enter 2018.

Great. Thanks, Jim. Jay, can we please take the next question?

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

Thanks. Hi, Martin and Patricia. Just I’ll ask on the transactional software side. So pretty good performance there in the third quarter. Do you feel good about that carrying into the fourth quarter, given the demand environment, as you see it today? I think you said that you’re not counting on transactional revenue in the fourth quarter. Does that mean we could see upside potential if 3Q trends persist? Just want to clarify that.

Sure, Tien-tsin. So, what you heard was a fair reflection of what we’re counting on, which is, we’re not counting on continued strong growth in parts of that portfolio things like transaction processing software. But make no mistake, the team is working on driving transactional performance in parts of that business, which quite frankly, we have a pretty hot hand in. We have got a hot hand in security. We’ve got a hot hand in some of the IoT space. So we will continue to see good growth in parts of the business. And then for software in total, our as-a-services business continues to grow quite well, and we would expect to continue to see the as-a-service performance continue to grow. As-a-service in total was up to $9.4 billion run rate when we exited, and that’s pretty good sequential improvement from where we were in the second and we’ll – we would expect that the fourth will also drive some growth. But again, the – we’re not relying on the TPS part of the business necessarily to grow. But our customer engagement business, our security business, these are businesses that have drawn a lot of investment and they’ve got a hot hand and they’ll continue to perform.

Thanks, Tien-tsin. Jay, can we please take one last question?

Thank you. Our last question is coming from Keith Bachman from Bank of Montreal. Your line is now open.

Hi, thank you very much. Martin, I also want to revisit on GBS, if I could. And the results relative to the rest of the businesses are still demonstrating challenges both on top line and on the margin profile. And the context of the question is, as you mentioned, application management is still experiencing challenge and all participants in the industry seem to be echoing the same thing. So if application management continues to experience challenges, what are the conditions that allows GBS to improve? and in particular, as you look at FY 2018, is it – well, how should we be thinking about expectations if we just isolate on the margin profile? If application management continues to experience those challenges, is it reasonable to assume that margins could flatten out? But any comments there on- broadly on the role of ADM within the context of GBS?

Sure. I mean, for us, this business is all about helping our client – helping our clients move to the cloud. So where we’re helping clients implement cloud-centric architectures, we’re moving them to next-gen apps like Salesforce and Workday and we’ve built terrific skills. We’ve even acquired skills to help accelerate this. There is plenty of room for us to both differentiate to get growth and to have good margin performance. So in those areas which are – we’re more able to differentiate, I think there is a good future there, and that’s what the team is focused on. And then in the other parts of the business, as I mentioned, the other parts of that business where it’s more difficult to differentiate and where others who haven’t built the kind of skill base that we have are trying to get inroads, then there’s some price pressure, but that’s not the future. The future for us is helping our clients move to those cloud-centric architectures and the cloud – the next-gen apps, which is what the team is positioned themselves well to continue to do not only in the fourth, but going into 2018. End of Q&A:

So let me wrap up the call and first, by saying thanks for joining us today. As we said at the start of the year and then we reiterated again in July, we said we see improved trajectories in the second half of the year relative to the first half then we talked about the drivers of that change. Our third quarter performance certainly reinforced that. And while we have more to get done in the fourth, it shows we’re on the right course. And it also shows quite frankly, that our confidence in our strategy is very well placed. So thanks again for joining us today and we’ll talk to you in January.

Thanks, Jay. Can I turn it back to you please to close out the call?

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