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 Patricia Murphy with IBM. Ma’am, you may begin.

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM, and I’d like to welcome you to our fourth quarter earnings presentation. I’m here today with Jim Kavanaugh, IBM’s Senior Vice President and Chief Financial Officer. 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 Jim.

Thanks Patricia, and thanks to all of you for joining us. The fourth quarter capped off a year where we grew revenue, operating pre-tax income, and operating earnings per share. We stabilized our margin as we moved through the year, and we expanded gross and pre-tax margin in the fourth quarter. We continued to invest and take actions to shift our business toward higher-value areas like hybrid cloud and AI, including the announcement of our acquisition of Red Hat. And we again generated solid free cash flow, which enables this continued investment and shareholder returns. In the fourth quarter, we delivered $21.8 billion of revenue, which was down 1% at constant currency, though down 3% with the impact of currency translation. As always, I’ll focus on constant currency results. Our operating pre-tax income was $5 billion, and we had $4.87 of operating earnings per share. We had strong performance in software, and in services we had revenue growth and gross margin expansion. This was offset by the expected impact of our IBM Z product cycle dynamics. Our total software revenue was up 2%. We entered the quarter with a good pipeline of software opportunities, and we executed well, driven by hybrid cloud adoption and strong demand for analytics and AI offerings. Total services revenue was up 2%. We had steady improvement in Global Business Services throughout the year, with 6% growth in the fourth quarter and revenue growth and gross margin expansion across all three of our GBS business lines. Global Technology Services had a modest revenue decline, with solid gross margin expansion. We had a great signings quarter, reflecting strong demand for hybrid cloud implementations and our value prop to deliver productivity. Our hardware revenue was down. You’ll recall in 2017 we had a terrific fourth quarter in IBM…

Thank you, Jim. 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. This includes the 2018 performance and year-end assumptions for our retirement-related plans, and supporting information on the 2019 implications of our divested businesses. 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 will now start the question-and-answer session of this conference. [Operator Instructions] Our first question is coming from Wamsi Mohan of Bank of America Merrill Lynch. Your line is open.

Yes, thank you. Jim, IBM delivered a nice profit trajectory here exiting 2018. In this weaker macro backdrop, it looks like you've a pretty robust 2019 guidance. And I was hoping that you can help talk through what the profit trajectory looks like and gross and PTI level in 2019 and some color on the broader puts and takes embedded in your 2019 guide including the IP income and taxes. That would be helpful. Thank you.

Okay, Wamsi. Thank you very much for the question. And it's probably a good place to start given we just concluded the prepared remarks and we talked about some of the dynamics of what's in our guidance. But as always, you would expect we run multiple scenarios here across our business and we're looking at the trajectory of our business, the macroeconomic environment, what our enterprise clients are telling us. And we also take into account our own operational indices in front of us and our business plans and strategies. And when we put all that together this is what gives us confidence in and expectation of our operating EPS of at least $13.90 for 2019. Now, as I just stated, this guidance excludes Red Hat just given to the timing sensitivity and the financial implications I want to close as, but it includes the announced divestitures. And we'll talk about that through all these Q&As with regards to any forward-looking guidance. But we enter – from my perspective, we enter 2019 with a much improved business profile in terms of one driving operating leverage and you saw how that played out in the second half. And it's right to the core of your question. And two, I mean, our strategic imperatives right now, the high value emerging segments in the IT industry are now consistently over 50% of IBM's business. So we don't give guidance on revenue. Let me give you a little color behind that and then I'll go to operating leverage and gross and pretax margin and tax, as we move forward. But first I'll start with a tailwind. We have a solid annuity base in our business, today it's about 60% of IBM and that builds resiliency into our model. And we got good momentum in…

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

Here our next question is coming from Toni Sacconaghi of Bernstein. Your line is open.

Yes. Thank you. And thank you for the clarification on the previous question. I just wanted to know if you could clarify what the size of the expected gain is on the sale of assets to Red Hat, excuse me to HCL. And then whether you expect directionally Red Hat to be accretive or dilutive to free cash flow and EPS this year? And then on software, could you comment on the strength that you saw, was it a push out? Do you feel like you captured large enterprise license agreements or is this sort of a more normalized book? And should we expect cognitive to grow in Q1 and Q2 at a similar pace to what we saw in Q4? Thank you.

Okay, Toni. Thank you very much. Very good questions. Let me try to take each of these piece by piece. First of all as you saw from our last earnings, we continue to take disciplined portfolio prioritization efforts around – our portfolio both in terms of an announcement of the acquisition of Red Hat and also the announcement of sale of certain assets within our cognitive and GBS business. Red Hat, as we talked about, expected was – we're working through regulatory right now. We expect to close that in the second half. But with regards to your specific question on divestitures, we included in our guidance the sale of our collaboration in non-prem marketing and commerce business and the sale of our Seterus mortgaging business. Both of these will drive headwinds as you can imagine in revenue for the year. We expect the mortgage business to close later in the first quarter. That will be a headwind this year to GBS revenue. But on a sustainable basis, this improves both our revenue profile in GBS and our margin profile as we continue to shift the higher value as we move forward. In terms of our Cognitive assets that we sold, with regards to collaboration in non-prem, those businesses generated roughly a little bit over $1 billion of revenue over the last 12 months. We said we expected to close that by mid-year. The transaction price was $1.8 billion, but the expected gain, I will tell you, will be a lot less than that $1.8 billion as we're working through the acquisition accounting right now with regards to goodwill and how much goodwill will be applied to that. But we still expect a sizable gain, nowhere near $1.8 billion, but a sizeable gain. And as we said, we've got to…

Thanks, Tony. And can we please go to the next question?

Thank you. Next question is coming from Katy Huberty of Morgan Stanley. Your line is open.

Thank you. Good afternoon. Congrats on the nice numbers in the fourth quarter. Question around linearity in 2019, there’s a lot going on with tax, grade, divestiture, another Red Hat numbers are in the guidance yet. But how should we think about linearity given that the timing of some of these discrete items may change the walkthrough in the year?

Okay. Thank you, Katy. And thanks on behalf of the entire IBM team, really just deliver the solid fourth quarter here. But if you take a look at, it’s very good question. Why don’t I just address it by trying to get some visibility into first quarter? It’s right in front of us right now. If you take a look at first quarter again, we guided full year EPS of at least $13.90. If you look at first quarter, first of all, on an EPS perspective, we would expect the operating EPS skew to be around 16% of the full year $13.90. So when you take a look at that, it gets us off to a good start. It does acknowledge that we are on the back end of a mainframe product cycle, but we got acceleration in our services and our software base of business. And we feel confident in at least that 16% starting out the year. Now, if you look at that compared to the last three years, it will show that it’s a little bit less attainment. But to your – heart of your question, the last few years we had substantial discrete tax items in the first quarter. If you go back to 16%, we closed on the Japan audit. If you go back to last year, we closed on the U.S. audit settlement. We do not see anywhere near the level of discretes in the first quarter. And I would project somewhere around 11%, 10%. There might be something within the first quarter, but we’re not talking substantial amount. So that is really EPS. On revenue, which we probably have the best visibility just given our operational indices, the mixed differential of our revenue base between annuity and transactional, when we move from a fourth quarter and the first quarter. That seasonality, the transactional businesses have a more muted effect on 1Q versus 4Q. And as the mix of more annuity content, which plays out in the first quarter, this should contribute about a 1 to 2 point sequential improvement and our growth at constant currency. We just came off our fourth quarter with many different dynamics that produce a down 1 at constant currency. So we do see an improvement just given the mixed shift in the strength of our annuity content as we move forward. The last thing that I’ll bring up about first quarter is, I talked a little bit about currency for the year, we have our toughest compare on currency in the first quarter, just given last year the dollar weakened throughout the first quarter and then dramatically accelerated or strengthen as we move through 2Q to 4Q. So as you saw in the supplemental chart, our currency impact is going to be a 3 to 4 point headwind and based on what I looked that were dollar closed late today, it’s going to be probably closer to that 4 point headwind overall.

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

Thank you. Next question is coming from Tien-tsin Huang of JPMorgan. Your line is open.

Thanks. I want to ask on services that improved, like you said, it would in 2018. I’m curious, your outlook is for 2019 within services, because there are some moving parts GBS is perform really well application management up into a nice place, so curious on a sustainability there. Just as a clarification away from the services, what strategic imperatives of 9%, there wasn’t as much talk about that in the prepared remarks. I’m curious, that still going to be a metric that’s going to be provided or attract going forward. Thanks.

Okay, Tien-tsin. Thank you very much for the question. We obviously are very pleased with our services business and how we’ve continued to reposition our portfolio both in GBS, but also in our GTS space of business as we move throughout 2018. But when you look at the trajectory of our business, we ended the year with an overall are absolute backlog of $116 billion, that’s down 60 basis points at constant currency and it’s a big improvement from where we started a year ago. If you remember our discussions here a year ago, we had a lot of discussion about your overall backlog is down 3% at constant currency and we talked a lot about what we saw play out in 2018 and the team’s just done an excellent job. We’re in a much better position. And we do see across our total services business in 2019 sustained revenue growth and margin profile. Well, let me take the pieces and just give you a little bit of perspective. GBS, I couldn’t be more proud of the team about what they’ve done to reposition their portfolio and their offerings in capturing, in delivering growth to our clients, in digital, in cognitive and cloud. You saw in the fourth quarter, we exited GBS, I’ll get these numbers pretty close. Strategic imperatives growing mid-teens, cloud growing 30%-plus and our as-a-Service based business, exiting would over a $2 billion number, I think up 64% overall. And we’ve got pervasive growth across all three lines of business led by digital. We did state an application management, where we finally returned back to growth in the fourth quarter. We are executing and delivering value and driving cloud migration services and cloud application development. We have a differentiated offering and we’re delivering value to our clients,…

Thanks, Tien-tsin. Can we go to the next question please.

Thank you. Next question is coming from David Grossman with Stifel. Your line is open.

Thank you. So Jim, you’ve announced two divestitures in the last six weeks, I think you mentioned in your prepared remarks, you are exiting some GTS business that was perhaps lower margin, slower growth. Obviously, without getting too specific, what else can you tell us about the other efforts that are underway to streamline the legacy core that may positively impact the agility of the organization as well as positively impact your growth rate.

Okay. David, thanks very much for the question. Let me take a big step back. Obviously I’ve been thinking about this as Jenny and everyone else. From my perspective, we constantly say IBM is a high value based company. We’re a high value to our clients. We’re high value to our shareholders. In the way we remain high value is through disciplined portfolio optimization. And whether you go over, what we just did the last 90 or 120 days or you go over the last three to five years, we have constantly focused on one, where is the market moving in terms of growth, high value offerings, client value, and most importantly profit pools. And you’re seeing us continue to do that as we move forward. These latest actions really center around disciplined portfolio prioritization around market attractiveness, around differentiation and around how they really play to the integrated value of the IBM portfolio. Our differentiated hardware software services, and that was really at the heart of the divestitures that we just announced around certain assets in our Cognitive Solutions segment and in our global processing mortgage servicing unit, they were basically more and more sold as standalone only products and offerings that can be leveraged and delivered to our clients through a different partner, who will make the investment prioritization as we move forward. I could tell you, we're always looking at portfolio optimization, and how we prioritize our investment and capital allocation and you see that with the announcement of Red Hat and you see that play out and what we just did with Cognitive and GBS. But as we go forward, we're going to continue to prudently managing our portfolio and operate what that financial discipline in terms of acquisitions. Our strategy hasn't changed. It's always been built around supporting high value. And it's about built around leveraging the investment thesis and narrative of IBM innovative technology, deep industry expertise and trust and security all delivered through an integrated model of hardware, software services. And then finally, I would tell you, we have a strong balance sheet. We have great cash flow and we have enough financial flexibility to continue to invest in our business and returning value to our shareholders over the long term. So we feel pretty good.

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

Thank you. Next question is coming John Roy of UBS. Your line is open.

Great. Thank you so much. So, well, obviously, cloud is a trend that everybody is giving off more importance here in the enterprise space and yet, you have somewhat of a flat quarter. I was curious as to when you win cloud deals as to why and how would you see the Red Hat acquisition is changing the color around why you win and how much you win?

Okay, John. Thank you very much for the question. Let me try to put this in perspective around cloud. First of our cloud overall for the year, it was $19.2 billion. That was up 12%. And within that, as we always talk about the high value emerging areas of as-a-Service finished when an annualized exit run rate of $12.2 billion up 21%, which really clearly underlines our consistent execution in us capturing the high value secular shifts around cloud in that as-a-Service. Now, when you look at cloud in the quarter, the cloud number as printed really reflects the same fundamental headwind on the wrap of the product cycle or mainframe that we had to overcome. Now that isn't new, we expected that. We've been talking about that all year long. Second half of the year, we knew we were going to be on the backend of our mainframe product cycle. Remember we came off a mainframe that grew 71% in the fourth quarter of 2017. And this is as I said before, the most successful mainframe product cycle in quite some time, which by the way generates and captures new emerging workloads around pervasive encryption, but also as capturing new workloads around cloud as we move forward. So that cloud business without mainframe was actually up 19%. That's an acceleration underlying our software acceleration from 3Q to 4Q underlining our services acceleration from 3Q to 4Q and we see that as we move forward because remember, although we had a deal with the largest transactional quarter on mainframe, albeit in 2019, that starts to dissipate because we're through that biggest volume based quarter. So we see cloud still resonating with our clients into your heart of your question about Red Hat, Red Hat and IBM together we see this movement of how we can deliver value in leading the second phase, Ginni calls this chapter two, the second phase around where clients are moving, very business critical business value lead workloads and that's about 80% of the workloads ahead of us. So the value of bringing IBM and Red Hat together is going to be centered around hybrid open multicloud and us wrapping around our security, secure to the core and how we're going to deliver that differentiated value proposition. And we're just excited about what Red Hat is going to mean to the IBM company and our clients.

Thanks John. And can we please take the next question?

Next question is coming from Jim Schneider of Goldman Sachs. Your line is open.

Good evening. Thanks for taking my question. Jim, it's good to see the improvement in software and cognitive relative last quarter. I guess the question is on a go forward basis or you have a target of mid-single-digit growth long-term in cognitive, is it realistic to expect that you could achieve that, as we head throughout 2019 and maybe talk about the impact of any of the transactional business you may have seen this quarter that might affect that, and just kind of talk broadly about the macro environment for that product fit in general?

Yes. Jim, thanks very much for the question overall. We are pleased with our software performance exiting the year. As I talked about, I think it's really an instantiation that demonstrates our ability to deliver innovative solutions embedded with AI, that drives business value to our clients really through an industry lens that plays across the integrated value of IBM. What are services base of business in stacked on top of our hardware based platforms, but when you look at fourth quarter, we exited 2% growth. We had good pervasive growth across the portfolio, as I said before, good, strong transactional growth, good SaaS signings, high renewal rates, and remember this cognitive solution segment is high value, high operating margins, and we continue to expand operating margins here in the fourth quarter and for the full year. Now when you take a step back, U.S. long-term, well obviously in 2019 we're going to deal with the headwind I talked about what the domestic content, that will to cognitive solutions probably be, on a trailing 12 months we did a over a little over $1 billion. It'll be about a four, five point headwind in 2019 and that's pre Red Hat acquisition because Red Hat’s not in 2019 yet. But we're going to have right off the bat of four to five point headwind. But the underlying fundamentals in our long-term sustainability around that. Yes, our long-term model has not changed. We still see the strength of our offering portfolio, one, even getting better around our hybrid integration software, two around our analytics portfolio, which just had a great quarter, a data AI, our industry based verticals our Watson Health had growth across many of its offerings as I talked about earlier. And even in IoT we had growth around our core franchises, our facilities management and asset management, Maximo, Tririga. So we got a good, good lineup. It's going to be on us to execute here in 20 – 2019. We fully expect to do that.

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

Thank you. Next question is coming from Joseph Foresi of Cantor Fitzgerald. Your line is open.

Hi, it sounded like in your remarks earlier that you thought you could deliver sustainable organic constant currency growth in 2019. And so does that include or exclude Red Hat and then just as importantly, maybe you can give us some color around first half margins versus second half margins and maybe what the margin exit rate will be for 2019? Thanks.

Sure, Joe, thank you very much for the call. First of all, we don’t guide on revenue for the year. So, I don’t remember stating that we are going to grow the year at constant currency organically et cetera. Red Hat is not in any of the guidance as we talked about upfront. We do have the divestitures in here and divestitures are going to be about a point headwind as we move forward and as I stated, currency is going to be a one or two point headwind at actual rates. But we do feel confident in the book of business we have around our services and around our software as we move forward. But the underlying dynamics as I talked about, we got many different scenarios we’re running here. All the point to given us confidence in our expectation of at least $13.90 as we move forward. That is going to be a mixture of the mix of our portfolio, the revenue of our portfolio, the operating leverage of our portfolio, the tax structure IP, there are many different variables that go into that $13.90 overall. We do see strong operating leverage continuing in 2019; both gross and pretax margin leveraging our scale efficiencies, leveraging our mixed shift, the higher value, leveraging our productivity initiatives. And when you look at it, we’ve got great momentum exiting second half in particular on our services base of business. Second half services grew operating gross margins by 200 basis points. And I think you would expect a similar first half trend around that and in second half, we’ll start wrapping on a little bit tougher compares, but for the first, excuse me, for the full year, we would expect good operating leverage and that’s what we’re guiding to.

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

Thank you. Our next question is coming from Jim Suva of Citi. Your line is open.

Thank you very much. In your prepared slides, Slide number 10, it was very informative to help us bridge the two different years on our earnings. The question I have is, as we look forward to next year I know you have a lot of variables, are there any bridge items that you want to particularly call us out for most likely to happen to hit your $13.90, and how come cash flow wouldn’t be growing if your earnings growing? Thank you.

Okay, Jim. First of all, thank you for the question. Thanks for the compliment. Team does work very hard that you provide the right level of transparency. So our investors can understand the operating dynamics of our business. Chart 10 lays out that full year. You see how 2018 played out, strong operating leverage, tax headwind, revenue growth at actuals when you look at it and you go back to beginning of January last year, we stated what we saw for the year. We grew revenue. We grew operating leverage. We grew operating pretax income. We grew earnings per share and that played out well. If you look at 2019, as I stated many different scenarios, but what have we talked about already on this call? One, we see continued operating leverage coming out of gross and pretax margin in 2019. Two, we do see tax being a headwind to us in 2019 and again, we tried to provide enhanced transparency, where we’re giving you an all in rate of at least 11% to 12%, but even with that, that’s a three to four point headwind. We’ll continue to buy back shares as we talked about. I think that’s one level of confidence and we have in the long-term value of IBM, but it’s also a level of confidence that we have in the power of the IBM and Red Hat acquisition. So, I think you could see that continuing to play out. And then I guess last, we talked about currency on revenue; currency on revenue, the impact of one or two points and the divestiture. So, we will continue showing the transparency of the CPS bridge, helps our investors understand the operating dynamics as we move forward.

And then jim, on your question on cash, as jim said in the prepared remarks, we obviously have a headwind from the divested businesses, because we have the forgone – we’ll have forgone profit and we’ll have a gain, but the gain doesn’t go into free cash flow. We also will have some items that hit our free cash flow relative to some pre-closing costs for Red Hat. So, that’s the reason that our free cash flow is flat despite the fact that we have a couple of headwinds within them. So, operator, why don’t we take one last question.

Thank you. Our last question in queue is coming from Keith Bachman of BMO. Your line is open.

Hi, thank you. Jim, just a clarification first then a question on the clarification, you mentioned the impact of the divestitures. And the slide that indicates the impact is $1.5 billion, I think you said $1 billion was coming out of cognitive and I just wanted to see if you just clarify, where is the rest coming out of? And then the question is on technology services and cloud platforms. I wanted to get your perspective as you look at 2019; this business continues to trail a little bit relative to GBS in terms of revenue performance. Would you expect or anticipate this business to grow and CY19? And therefore, would you expect operating leverage to also be demonstrated in this business? Thank you.

Yes. Thanks keith for the question overall. First of all, on your clarification, the impact of divestitures, we actually did provide a supplemental chart that hopefully each of you and our investors will appreciate on the transparency and the implications both on 2019 and then directionally on 2019. I think, I said a little over $1 billion, if you look at Chart 15 in the supplementals, the cognitive software assets of divesting collaboration and our on-prem marketing and commerce was about a $1.3 billion. So that’s what I meant about a little over $1 billion. When you take a look at the GBS mortgage servicing divesture that’s about $200 million, so on a full year basis annualized it’s about $1.5 billion between the two of them. So hopefully that answers the clarification. And then on your second question, TS and CP, we finished the year with strong signings growth, which really instantiates our hybrid cloud value proposition and also the value of incumbency that we provide with our clients of understanding their workloads, understanding their business processes, and enabling us to move them to the future and capturing that cloud backlog. In fact cloud backlog is up over 5 points year-to-year as a percent of our total outsourcing backlog. But as I said earlier, GTS business, we are going to manage this business for profit, for cash and for leveraging our incumbency to move our clients in the future and provide better client value and delight them through loyalty as they move forward. And we are going to exit some low value content business. So for 2019, I would expect pretty similar performance in GTS overall on a top line, but in margin we are going to expand margin that’s in our expectations and you see that play out in the second half of 2018 and we expect that to continue. So, all right, with that said, apologize for going a little bit long here, we wanted to get a lot in here, one about the quarter but two about wrapping up the year and what it means for 2019, so a few comments to wrap up. We’re entering 2019 in a great position to help our clients whether they’re looking for innovation or productivity or both. We’ve got a solid base of business. You see this in our software and services results with strategic imperatives now consistently at about half of our revenue. And an operating leverage we’re driving and we expect that to continue. This gives us confidence in our expectation of at least $13.90 of earnings per share for the year and our hand-rolling gets stronger with the addition of Red Hat, which positions us as the leader in hybrid multi-cloud world. So thanks for joining us today. We look forward to continuing the dialogue over the course of the year. Thank you very much.

Okay. And let me turn it back to you to wrap up the call.

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