Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I will turn the meeting over to Ms. Patricia Murphy with IBM. Ma'am, you may begin.

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM. And I want to welcome you to our first quarter 2019 earnings presentation. I'm here with Jim Kavanaugh, IBM's Senior Vice President and Chief Financial Officer. We will post today's prepared remarks on the IBM Investor website within a couple of hours, and a replay will be available by this time tomorrow. Some comments made in this presentation may be considered forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the Company’s SEC filings. Our presentation also includes non-GAAP measures to provide additional information to investors. We've provided reconciliation charts at the end of the presentation and in the 8-K submitted to the SEC. Before turning the call over to Jim, I want to remind you we recently made changes to our management system and our organizational structure. Our segment reporting for 2019 has been updated to reflect this business structure. We provided two years of historical financial information by quarter on these segments a couple of weeks ago, and this can be found on our investor website. And today, we will be discussing our first quarter results in this new segment structure. So, with that, I'll turn the call over to Jim.

Thanks Patricia, and thanks to all of you for joining us. In the first quarter, we delivered $18.2 billion of revenue with significant operating leverage. We delivered $2.2 billion of operating pretax income and $2.25 of operating earnings per share. And we have now generated over $12 billion of free cash flow over the last year with realization well over 100%. We had strong performance in offerings that help clients with their digital transformation and journeys to cloud. At the same time, we continue to take actions to optimize our portfolio, while investing to lead in the emerging high-value areas of the IT industry. You saw this play out in our results. Our Cloud growth accelerated to 12% at constant currency. Our Cloud and Cognitive Software was up 2% and our Consulting revenue was up 9%, also both at constant currency. We had significant margin expansion with operating gross margins up 90 basis points, driven by both services segments and we had solid free cash flow. Improving margin has been a focus for us and our performance this quarter is a result of actions we have been taking, not only our focus on higher value and portfolio optimization but also driving productivity and operational efficiency, especially in our services business. With this start to the year, we are maintaining our full year expectations for operating earnings per share and free cash flow. In the first quarter, our revenue was down less than a point year-to-year at constant currency, slightly better than our fourth quarter performance. Our reported revenue as expected includes a significant in currency headwind as always, all focused on constant currency performance. From a geographic perspective, our year-to-year revenue growth in the developed markets improved a couple of points sequentially, consistent with the expectations we discussed last quarter.…

Thanks 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 second, as always I'd ask you to refrain from multipart questions. So operator, please open it up for questions.

Thank you. We will now begin the question-and-answer session [Operator Instructions]. Our first question is from Katy Huberty with Morgan Stanley. Your line is open.

Katy, you there, we can't hear you. Maybe you're on mute.

Okay. It looks like she is no longer showing in queue. Would you like me go onto next question?

Yes. Please.

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

Jim, I'm just wondering if you can comment about how the quarter turned out to your expectations 90 days ago. I think at the time in Q4 you delivered minus 1% growth to constant currency and you've stated that revenues would improve 1 to 2 points in terms of the growth rate, which didn't occur. And on the margin side when I back out restructuring expenses, it actually looks like operating margins declined year-over-year in Q1 and even if I adjust for IP income, it still looks like they were flat year-over-year. So perhaps you can address each of those, particularly relative to your expectations 90 days ago and whether there was anything that fell short of where you thought you would be? Thank you.

Sure, Tony and thanks as always for your question. There is a lot packed into that. So let me take a step back and just give you a perspective of how we saw the quarter play out, and I'll touch on each of your points here as I go through this. We feel like through the first 90 days of the year, we started out with a solid performance. Why, because we see the fundamentals of our business model playing out in terms of growth in key high value areas, whether that'd be cloud and our acceleration there, security, digital and data and AI. And while we see the growth in those key high value emerging areas, we're also delivering strong operating leverage by expanding margins, growing pretax income, expanding operating pretax margins and delivering strong free cash flow. So when you look at the quarter, let me start with revenue, because you've talked about what we expect in 90 days and where we're at. Underneath our revenue, we see continued momentum in our GBS business led by consulting, strong growth again 9% as we're enabling clients to really move on their journey to cloud and drive their digital reinventions and competitive advantage. We also had solid execution in our cloud and cognitive software where our value propositions around hybrid cloud are playing out very nicely and we're winning in the market. And we saw accelerated growth in our cloud-based business. Basically going from mid-single digits in the fourth quarter when you look at our cloud performance to now exiting first quarter where in the quarter we grew 12%, and now we have a trailing 12 month $19.5 billion cloud business that's growing 12%. Now from geography perspective and it gets right at the heart of your question, we talked…

Okay Brandon. Can we please go to our next question?

Our next question is from Katy Huberty with Morgan Stanley. Your line is open.

Jim, what was the thought process behind not giving strategic imperative segments anymore? And then how are you thinking about Cloud and Cognitive Software growth going forward relative to the 2% growth over the last couple of quarter and especially in the context of the delayed deals that you've referenced in Toni's questions?

Around strategic imperative, again, let me put this in perspective. We put this sign post out back in the beginning of 2015 if you all remember at our Investor Day. Why, because we had to lay the groundwork and how is the Company we needed to fundamentally shift our capital investment allocation and transform our portfolio into capturing the shifts in growth in cloud and data, and analytics, and security, and mobility. Now you fast forward to the end of 2018 and at the time we made this announcement with that signpost, we were about less than a quarter's worth of our business, I think Patricia. We exited '18 where we were consistently above 50%. And when you take a look at that that has become more and more, or I should say less and less of a relevant metric as we move forward. And more importantly, as I've spent quite a bit of time over the last quarter, both at Think with many of you as analysts and also with our investors, to talk about as we changed our external segmentation to reposition and get this company focused our chapter two and the journey to cloud and hybrid cloud. The same feedback we got from many of you and many of our investors is the strategic imperative metric has passed its course and they are looking for now what are the relevant metrics on managing the Company moving forward. And that as we put out in our new segmentation is going to be around cloud, in particular, accelerating our leadership position in $1 trillion market opportunity around hybrid that is going to be around as a service and our scale efficiencies and margin. And finally, it's going to be around operating leverage and value. And that is going to…

Thanks Katy. Can we go to next question please?

Our next question is from John Roy with UBS. Your line is open.

Jim, I've question for you on really, you were talking about organic constant currency revenue growth. And it looks like you are saying that if the transactional business that come through, you really would have had at this quarter. I'm really questioning or I want to get an idea of how sustainable do you think that is? I mean, if the transaction itself comes through, can you really continue to see organic constant currency revenue growth?

Yes, if you take a look at it John, obviously, we don't give guidance on revenue. But let me give you some dynamics of how we're seeing the business, both around the trajectory of coming out of first quarter but also the operational indices we see right in front of us, and our business plans and strategies that we're executing on moving forward. First, around GBS. Our GBS business has a lot of momentum. We actually delivered signings growth again for our GBS business those were -- we got great momentum around our consulting business and it's driving the digital reinventions of our clients and our journey to cloud. And we see that they are just continuing that momentum in growth right in front of us here in the second quarter. But second half is going to be dependent, as you know, in a very short-term fast yielding type of backlog. We got to continue doing the signings in 2Q, that's going to fuel backlog, that's going to fill revenue in the second half. But we feel good and we feel consistent growth in GBS. In Cloud and Cognitive Software, as I just answered to Katy, we feel confident in that offering portfolio and we also feel confident in continued growth here in the second quarter pretty consistent performance. Around GTS, as I mentioned in our prepared remarks and I'll go back to what we talked about add late 90 days ago, is we embarked on a very conscious strategy around exiting low value third-party OEM content. We said at that time it was going to depress revenue in the near-term but have higher value and higher margins. And better position our portfolio for the long term as we go through the acquisition closure of Red Hat and really trying…

Thanks John. Can we go to the next question?

Our next question is from Jim Schneider with Goldman Sachs. Your line is open.

Maybe Jim, I was wondering if you could comment on the overall performance in the services business. Signings were down year-over-year but seems like you're continuing to see very good growth in GBS and maybe little more tempered performance in GTS. So can you maybe just give us a sense about where clients headed at in terms of our new services contracts overall, and maybe any diversions you're seeing in bookings within GBS and GTS right now?

As you stated, yes, signings were down, down 14% if I remember correctly, about $7.5 -- $7.6 billion overall in signings. But let me take a step back and give you some of the dynamics underneath that, because I think it's very, very important because wire signings and indicator that's of interest to all of our investors, because it leads the backlog that then leads to backlog realization and revenue. And as I've said many quarters, all signings are not equal and they vary. They vary with lumpiness, mainly based on the size of signings. And when you look at our first quarter, our first quarter being down 14%, our greater than $100 million signings were down over 50%. Why, because we just came-off of a fourth quarter, if you remember 90 days ago, where we had one of our strongest quarters in greater than a $100 million signings in years where we signed 19 deals greater than a $100 million and we actually had signings growth well north of 25%. Also, we had a very strong signings quarter, particularly and greater than $100 million deals last first quarter where we signed 10 deals and our greater than $100 million signings were up a 130%. So we had a very tough compare as we both looked at last year and also just on what we executed with solid execution exiting the year. But now let's take a look at backlog. Backlog has many factors that influence, and signings only being one of it, the duration, the mix of those signings, erosion and client dissatisfaction issues and also new signings, new logo versus extensions. And when you take a look at our GBS business, to your point, we have strong momentum. We grew signings in the first quarter, because while our…

Thanks Jim. Brandon, could we please take the next question.

Our next question is from Tien-tsin Huang with JP Morgan. Your line is open.

Hey good afternoon, forgive me for asking another GTS question, but that was the only real delta I think versus our model with margins being better, revenue being a little bit lighter. So I heard everything you just said, you mentioned GTS in the near-term should be pretty consistent with what we saw on Q1. But I'm curious, if you wanted to reconcile your prioritization of margin versus growth, the portfolio cleanup, the deterioration in signings and maybe even re-segmentation impact on revenue and when might we see an inflection point would you care to remix back to growth? Because there's a lot going on there, just trying to make sure we could recast this properly.

Okay, Tien-tsin, thank you very much for the question. On GTS, I'll remind all of us last quarter, we discussed the portfolio prioritization efforts that we were doing in GTS. Why? We continue to focus and shift this business to higher value for our clients and win in the marketplace. And over the last few quarters, we have been exiting low value content in our GBS business that we said would have some near-term impact on revenue, but will result in higher margins and more importantly a better business profile going forward over the long-term. And if you look at first quarter, that's exactly what played out. Our GTS revenue was down about two points from exiting that lower value content, but Tien-tsin to your question. Our gross margins where I really believe in services based business where value is really instantiated. We're up a 110 basis points year-over-year as we continue to drive the value of that mix shift, our productivity initiatives and our cloud scale. But let me spend a moment as to why? Why are we doing this? This is part of a very conscious strategy to focus this business on margin, profit and cash. We chosen our investment prioritization and Chapter 2 was all about leading in hybrid multi-cloud, high-value market with the acquisition of Red Hat and the combination -- through a combination of cash and debt. You see we are very focused on maintaining a very strong balance sheet and are maintaining our strong investment grade profile and paying down that debt and getting back to our targeted leverage ratios in a few years. We've committed that to our shareholders, and we are taking the actions. GTS being one action about getting out of low value third-party content, that ties up our balance, that ties up our financial flexibility and brings little to no profit to it. The second is our IGF business where we made a decision to get out of our commercial OEM that in addition to, as we stated the intense is to spend share we purchase in 2020 and 2021. So, we are serious about our investment personalization, the lead in Chapter 2. We're serious about getting our balance sheet and continue on the strength of that to support our dividend growth policy and continue to invest in our business, and we're serious about driving the innovation and the investments to win in that space. And I'll just conclude to your question. GTS has tremendous value to our integrated model of IBM. 90% of our most strategic accounts, we call them integrated accounts taken advantage of IBM's integrated value through outsourcing. More than 50% of the software used in our sourcing is IBM content and that’s growing, and 60% of our outsourcing engagements include the management of mainframe. So, it is very integral part, we're been selective in our investment prioritization because we chosen where we want to win and how we're going to win going forward.

Thanks, Tien-tsin. Let's go to the next question please.

Our next question is from Steve Milunovich with Wolfe Research. Your line is now open.

Jim, you typically take a workforce rebalancing in the first half of the year. You talked about the divestitures not having much net impact. Is that because you're going to include essentially a workforce rebalancing in that beyond just the divestiture and Red Hat and so forth? Or are we going to see a bigger separate charge at some point?

Yes, thanks, Steven. It's good to hear from you again. Yes, let me put in perspective. From a product perspective, around the announced divestitures which most recently included the sale of our marketing and commerce remaining products Centerbridge that on an annualized basis about $1.8 billion, right. From a profit perspective very said very consistent the last quarter that we are going to have a gain on the sale, we're going to have a foregone profit and stranded cost, we were going to take actions to address the foregone profit -- or excuse, the stranded cost and structure of our business overall. And when you take all of that together, there is going to be minimal impact on our full year and let me bring this home to second quarter right now, because as we stated, we expect to close majority if not all of this by the second quarter. And when we take each of the components, the gain on sale, we expect the gain on sale to somewhere be between $500 million and $700 million. And our guidance assumes for right now it’s the low end of that range. With your question, we're going to take actions to address the stranded cost and structures that’s going to spend a majority, a vast majority of that gain. And then Steve as you know, the return on that restructuring in those actions will help us mitigate the foregone profit in the second half of the year because the second half of the year, we are going to have about a two point revenue headwind with that business gone and we'll have a foregone profit that we're going to have to manages as we go forward, so both for the full year and in the second quarter, minimal to no impact to our profit overall.

Thank you, Steve. Brandon, could we please take the next question.

Our next question is from the David Grossman with Stifel Financial. Your line is open.

Jim, obviously, you've been open active in divesting or licensing in certain lines of business that are no longer core to your strategy. We certainly understand your reluctances to talk too much about this publicly, but is there anything that you can share with us that they give us, some idea of how many other assets in the portfolio may this profile? And how much of a drag there has been on your growth rate?

Thanks David. And I think you've answered your question yourself already. I am not going to comment on any further actions, but I'll just give you the high level perspective. IBM is the high-value company and how we remain high-value is through portfolio optimization. We consistently look at our portfolio, and I think we stated this many times before, we look at many different factors from market attractiveness to our ability to win and differentiate to where client value and profit pools are shifting overtime to the value of our integrated model and how well that place together. And we will consistently do that to make sure that we are optimizing the right level of return for our investors, and we can win in the marketplace and deliver the innovated value and technology to our clients to enable them to win and create competitive advantage. And that's what we're focused on overall, David.

Thanks Dave. Let's go to the next question?

Our next question is from Jeff Kvaal with Nomura/Instinet. Your line is open.

Yes, question and perhaps a clarification. I think the question is. Could you Jim, help us with the Cloud as a Service revenue? It seems as though the cloud revenue overall accelerated, but I'm not sure that translates to be as a service side of things. I wondered, if you could help shed some light on that? And then secondly, it seems as though you were indicating the backlog for GBS grew and GTS was flat, but it looks like the overall backlog is down and I'm trying to square that circle?

Sure, Jeff. No problem. Thanks for the question. So -- but actually both kind of clarification question, so let me just try to address it real quick and directly. Our as a Service -- first of all our cloud, our cloud business accelerated in the quarter. First quarter, we grew 12% overall at constant currency that comes up mid single digits in the fourth quarter. If you look at our as a Service business within that, our as a Service business now has an annualized exit run rate of 11.7 billion and that's up mid-teens. I think 15% if I remember correctly. And that is down quarter-to-quarter, but Jeff I would tell you that's due to normal seasonality and also as we talked about in the fourth quarter, there were specific project milestones that we achieved in our AMS business that drove that our AMS business to a 4% growth in the fourth quarter, we said that would normalize back down to about flat. So when you take a look at normal seasonality from fourth quarter to first quarter, and you take into account to catch-up of those project milestones as we continuously improve our service delivery quality that was expected from our perspective and we see that continue momentum building throughout the year as we move forward with the value of our offerings and proposition. And just a clarification question, on backlog. Backlog is down 2% at constant currency. I stated that GBS signings grew, and we have continued momentum in the backlog overall it did not make a comment about that. But I give you some color around the dynamics of the backlog as our GBS business as we architected our offerings and you see a play out in consulting our backlog is moving to a much short duration, higher faster yielding content with greater quality less erosion and its driving backlog realization and revenue momentum. Overall, I did not make a comment about GBS backlog overall.

Thanks, Jeff. Brandon, why don’t we take one last question?

Our last question is from Keith Bachman with Bank of Montreal. Your line is now open.

Jim, I also want to ask about services and the growth rates. And particularly, if I look at GBS, could you make some comments on the durability of that? It's the first part my question. Application maintenance was flattish. Consulting was pretty good at 9%. Should investors be thinking about 3% to 4% growth for the year? And then the second part of my question as it relates to services, if you could revisit since you've had some time since the Red Hat deal was announced. What are your expectations about how the services business, both GBS and really GTS, how the Red Hat business may impact growth or improve growth once that's included into your portfolio, because I think investors are frankly concerned that GTS may have a long runway or runoff here, but how you're thinking that Red Hat may impact both services business but particularly the GTS side?

Thank you, Keith for the question. GBS overall, as I stated, we have very good momentum in the business. Coming throughout the second half of 2018 and into the first quarter where we grew 4% led by consulting up 9% and within that great growth in digital strategy, iX, -- excuse me, our cloud migration and implementation services. NextGen enterprise apps growing. So very good momentum overall. And again, we're coming off another quarter of growing signings, especially in small deals. So when we look at right in front of us we see pretty consistent performance. I think you said somewhere around 3%. Plus or minus, we see that right in front of us and if we continue as we stated winning in the marketplace and driving those signings in the second half is going to fuel backlog, it's going to fuel revenue, we feel pretty confident as you know we run multiples scenarios about our guidance, which by the way is on earnings per share and free cash flow but we feel pretty confidence that we got a strong hand here, our team that’s executing on the field and we're delivering real value to our clients and that’s why we're seeing the performance overall. The second question I think you asked if I remember correctly was around our services businesses and Red Hat. First and foremost we're very excited about the potential combination of IBM and Red Hat as we talked about I think in a handful of other areas around us accelerating the leadership in a $1 trillion hybrid cloud market. We believe this differentiates us as we move forward and we can’t be more excited when you look at Red Hat performance, exiting fiscal year 19 and what they reported and shared publicly, accelerating revenue up in…

Thanks, Brandon. Let me have you close up the call.

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