Patricia Murphy - Vice President of Investor Relations Martin Schroeter - Senior Vice President and Chief Financial Officer

Katy Huberty - Morgan Stanley Amit Daryanani - RBC Capital Markets Toni Sacconaghi - Bernstein David Grossman - Stifel Financial Wamsi Mohan - Bank of America Merrill Lynch Steve Milunovich - UBS Jim Suva - Citigroup James Schneider - Goldman Sachs Tien-tsin Huang - JPMorgan Keith Bachman - BMO Capital Markets

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 over the last 12 months was also up 10% to $34.9 billion, and now represents 45% of IBM. We’re embedding cloud and cognitive capabilities across our business, and our strategic imperatives, as we’ve said, are a signpost of the progress we’re making in helping our enterprise clients to extract value from data, and become digital businesses. And so our strategic imperatives aren’t separate businesses, but a view of the revenue across our segments that provide our clients with analytics, cloud, security, mobile and social capabilities. This quarter, our Cloud revenue was up 20%, and over the last 12 months has grown to a $15.8 billion revenue base, which represents 20% of IBM’s revenue. Our as-a-Service revenue was up 24% in the third, and we exited the quarter with a $9.4 billion annual run rate. We’re able to drive these results, because we’re focused on helping our enterprise clients transform their IT. Keep in mind, the IBM Cloud is built for the enterprise. It is the only cloud that integrates public, private, multi-cloud and traditional data centers through a single architecture and is designed for cognitive workloads. So as our clients look to use AI to extract value from data, Watson on the IBM Cloud is the AI platform for business, differentiated by vertical domain depth and in how it protects our clients’ data and insights. Because for enterprises, data matters, and industry matters. And that’s why we’ve built industry-specific cloud-based Cognitive Solutions in areas like oncology and life sciences in Watson Health, and risk and compliance in Watson Financial Services. They address new opportunity areas outside of traditional IT. Our analytics revenue includes these new vertical businesses, as well as established horizontal offerings, like DB2, that are being transformed, are high value, and play a critical role in our clients’ environments. In total, analytics revenue was up 5% this quarter to nearly $5 billion. So this business is large, and it’s growing. In security, we’ve recently embedded cognitive into many of our offerings. This quarter, across our segments, security grew about 50%, driven by our security software solutions and strong demand for the pervasive encryption capabilities in our new z14. The mainframe is a great example of a core platform that we’ve continually modernized, and now with new capabilities like machine learning on z and pervasive encryption, it’s been reinvented again for the cognitive and cloud era, as well as an ideal platform for blockchain. As we build and scale new businesses, partnerships and ecosystems play a critical role. And so in the third quarter, we continued to launch new blockchain partnerships and networks, including an initiative with a group of leading food retailers and suppliers including Walmart, Kroger, Dole, Nestle and Unilever to address food safety. And we’re partnering with UBS and several global banks to build a blockchain-based platform to support trade finance. In the area of big data, in partnership with Hortonworks, we announced new capabilities that allow data scientists to do big data analytics using IBM products on the Hortonworks data platform. And in the third quarter, we formed a new partnership with MIT to create the MIT-Watson AI lab. We’ll mobilize the talent of more than 100 AI scientists, professors and students to advance AI hardware, software and algorithms, and increase AI’s impact on industries and enterprises. So across our business, we’re embedding cloud and cognitive capabilities into our offerings, which is fueling the shift to strategic imperatives. In many cases, we’re building new businesses that address new markets, while in others we’re investing to reinvent existing businesses with these same technologies. This is what you see in our revenue and profit dynamics. So now, let me move on to our financial metrics for the quarter. Our revenue was $19.2 billion, and when you look at our revenue performance by geography, we had sequential improvement in the year-to-year performance in all three major geographic regions, so as I said earlier, broad-based improvement. EMEA revenue performance improved 3 points from last quarter, to down 1% in the third. We had year-to-year growth in Germany, France, Italy and Spain, mitigated by declines in the UK. We recently signed large services engagements to provide cloud and digital services to clients in the UK, Germany and Spain. I’ll touch on a couple of them later. Our Asia Pacific revenue growth improved nearly 4 points and was up 2% year-to-year, with good growth in Japan and China. The Americas year-to-year performance improved nearly a point, driven by the US. Looking at our margin performance, our gross margin was down 40 basis points year-to-year, which is another significant sequential improvement. Last quarter, we talked about the margin dynamics for the second half, and we said we’d get some improvement from mix and from productivity, which we did. And we said the impact from investments would moderate. So our margin came in as we said. Our operating expense was down 1% versus last year, with little impact from currency and acquisitions this quarter. Our expense dynamics reflect the continued efficiency we’re driving in our underlying spending base, while continuing to invest to build and reinvent our platforms and solutions. Included within the 1% reduction, we had about $220 million less IP income year-to-year, and absorbed an impact of about $100 million year-to-year in SG&A associated with some commercial disputes. Our operating pre-tax profit was $3.6 billion and pre-tax margin was 18.8%, which is down just 20 basis points year-to-year, and up sequentially. Our tax rate for the quarter reflects an ongoing operating effective tax rate of just under 15%, consistent with last quarter, and we had no discrete tax items in the quarter. On the bottom line, our operating EPS was $3.30, essentially flat year-to-year. We generated $2.5 billion of free cash flow, which is similar to last quarter and last year’s third quarter, and we continue to expect our free cash flow for the full-year to be relatively flat year-to-year. Over the last 12 months, our free cash flow of nearly $11 billion was 96% of our GAAP net income, and supports both a high-level of investment and shareholder returns. Now turning to our segments, Cognitive Solutions revenue was up 3%, and pre-tax income was up 5%, so better than balanced performance this quarter. Both Solutions Software and Transaction Processing Software grew 3% and we had growth in both our annuity content and our transactional businesses. Within our annuity content, our SaaS offerings had double-digit growth in revenue and signings again this quarter. And we also had continued growth in our software services, which support our solutions offerings through industry and product expertise. We also had good software transactional performance, as clients commit to the platform for the long term. Our Cognitive Solutions revenue growth is driven by organic performance, as we’ve wrapped on most of our acquisitions. And we continue to invest to combine organic and acquired content to build cloud-based cognitive offerings. Within Solutions Software, growth was led by offerings in security and analytics. Our analytics growth was broad-based, including Business Intelligence & Data Discovery, where we had triple-digit SaaS growth led by Cognos Analytics. We also had strong growth in data warehousing, where we’re continuing to reinvent these offerings. For example, in September, we launched our new unified data system, which leverages our DB2 technology and is built on IBM Power. Also in analytics, we had strong growth again this quarter in Watson, our Enterprise AI platform. Conversation API usage again had strong double-digit growth quarter to quarter. Clients have embedded cognitive into their workflows and are seeing compelling returns. For example, in January, the Royal Bank of Scotland launched Cora, leveraging both our conversation and discovery services. Cora now deflects nearly half of the calls from traditional channels while improving customer experience, significantly cutting down waiting times and freeing up time for call-center staff to deal with more complex problems, and we are benefitting from Cognitive ourselves. IBM’s client support teams use Watson to help drastically reduce response time on more than 3.5 million service requests per year. Watson is trained on 7,000 IBM products and provides instant resolutions, based on what it has learned from previous similar requests. Watson has contributed to a 30% reduction in problem determination time across our Technical Support Services business. We’re embedding cognitive into our Security offerings as well. Security software grew double digits this quarter, and this is clearly a hot market for us. We had strong growth across our security portfolio in areas such as endpoint protection, incident response and security intelligence, with offerings like Resilient and QRadar. Our clients using QRadar Advisor with Watson are seeing measurable results. For example, clients found threats 60 times faster than manual investigations, and complex analysis went from an hour to less than a minute. As you would imagine, nothing matters more than time in these situations. Acceleration in the number of cybersecurity threats, the increasing requirements of regulatory compliance, including the upcoming GDPR, or General Data Protection Regulation, and our collaboration with Cisco and other partners on threat intelligence drove strong demand this quarter. Looking at IoT, our revenue was up double digits this quarter. We introduced new offerings like IoT for Connected Products, as well as key enhancements around security and risk management. We signed nearly 40 new clients to the IoT Platform, including a shipping logistics provider, a global electronics components distributor, and a leading provider of wireless networking solutions. And the number of developers grew at a strong double-digit rate. As we’ve said, an industry lens is key to our cognitive strategy, and this quarter, Watson Health continued to drive double-digit growth, with strength in Government, Oncology and Life Sciences similar to last quarter. We continued to expand the number of patients touched by Watson across our global ecosystem, as well as expand the number of countries. We also had strong growth in Watson Financial Services, as clients look to evolve their financial systems to make better-informed risk and compliance decisions, as well as modernize their core systems, like their payment gateways. Turning to Transaction Processing Software, we had a strong quarter, with revenue up 3%, reflecting our clients’ ongoing long-term commitment and the value our platform provides to them. This portfolio predominately runs on-premise, mission critical workloads in industries like banking, airlines and retail running on z Systems. So for the Cognitive Solutions segment, we’re embedding cognitive, scaling platforms and building high-value vertical solutions. We grew revenue in the quarter, which drove total IBM software revenue growth, and we expanded the Cognitive Solutions pre-tax income margin. Global Business Services delivered $4.1 billion of revenue this quarter. The year-to-year performance is similar to last quarter, as we continue to transform the business. We’re investing to shift our practices to where we see the opportunity, which is around digital, cognitive, cloud and automation. Over the last 2.5 years, we’ve added tens of thousands of resources to these areas. We grew double digits in our strategic imperatives, and overall GBS signings grew for the third consecutive quarter. With modest growth in signings, it takes time for our progress to be reflected in revenue and profit. Consulting revenue grew 1%, led by our digital strategy and iX platform, which is up over 40%. The consulting backlog also returned to growth this quarter. IBM iX is helping clients digitally reinvent themselves. IBM iX was an early mover in the digital space, and we’ve built a global network where clients can co-create with us. We now have 36 studios around the world, which gives us unmatched reach. We recently announced the intention to acquire Vivant, a digital agency based in Australia. This adds to the acquisitions we did last year in Europe and North America to bring in new skills and rapidly expand our global iX capabilities. We’re also leveraging strategic partnerships and investing in emerging technologies. In the third quarter we signed a five-year collaboration with Volkswagen to develop new mobility services that will utilize our cloud and cognitive capabilities to create highly personalized digital experiences for drivers. We also launched our blockchain services practice that will include more than 1,500 consultants who can help enterprises implement blockchain-enabled business models. Application Management revenue declined 3%. We grew in the practices that help clients implement new cloud-centric architectures in their critical applications. We’re leveraging our incumbency to modernize their application suites by implementing cloud-based microservices and helping them build cloud-native applications into their environments. Overall performance was impacted by areas that are not as differentiated, where we are seeing pricing pressure and driving productivity for our clients. Turning to profit, our Global Business Services gross profit margin decline was similar to last quarter. The GBS PTI margin of 10.8% is up 3 points sequentially, and the year-to-year performance improved by over a point. The GBS margin has been impacted by the investments we’re making to drive our transformation. We are acquiring to bring in important new skills and scale them across the organization. We’re investing in the enablement of our practitioners, shifting resources to new areas, while also hiring top talent. The margin dynamics also reflect pricing and profit pressure in the more traditional IT services, such as back-office implementations of on-premise applications and parts of the Global Processing Services business. As we go forward, we are focused on improving our productivity with a streamlined practice model and new project management approaches. So in summary for GBS, the revenue and profit trajectory was similar to last quarter. Consulting returned to growth while Application Management decelerated. We continue to grow in our practices around cloud, analytics, and mobility services, and we’re investing in our skills to continue to drive our GBS transformation. Technology Services & Cloud Platforms generated $8.5 billion of revenue, with year-to-year performance similar to last quarter. We continue to grow revenue double digits in our strategic imperatives, led by cloud. The annual as-a-service run-rate for the segment is now $6.2 billion. With good momentum in our cloud offerings, we grew overall GTS signings by over 25%. Our total services backlog trajectory improved by 2 points compared to last quarter as we returned to backlog growth in Infrastructure Services. GTS continues to be the market share leader, and is nearly two-times the size of our largest competitor. Looking at the lines of business, Infrastructure Services revenue was down 5%. This reflects the fact that we haven’t yet wrapped on the year-to-year headwinds that we talked about earlier this year, and we’re not yet yielding the full benefit from some of the new contracts we signed in the first half. In addition, we’re shifting away from some lower value work. We had strong signings performance in Infrastructure Services this quarter, as clients look to implement hybrid cloud environments. They turn to the IBM Cloud, because it’s designed for data, AI, and security, and it’s the only cloud that integrates public, private, multi-cloud, and legacy data centers through a single architecture. For example, at BBVA, the second largest bank in Spain, we signed an agreement to transform their current infrastructure. This will create the foundation for them to move ahead with their cloud strategy. We’ll work with BBVA to optimize their infrastructure, while enabling them to maintain control of their data and operations. Technical Support Services revenue was down 2%. We’re focused on driving our multi-vendor support offerings, which provide our clients with a single source of expertise and visibility across different vendor solutions. For example, we are working with HSBC to support data center maintenance of banking locations across 60 countries. In the U.S., we are providing an integrated solution to Walgreens that includes retail analytics and IBM Cloud infrastructure to improve the efficiency of field service support at over 8,100 drug stores nationwide. And in South Korea, we’re deploying a multi-vendor support solution with Hana Financial Group to standardize the IT maintenance systems at three of Hana’s subsidiary groups. Looking at the software content within the segment, Integration Software revenue was down 3%. And within that, we continue to have strong growth in SaaS across the portfolio, as we help our clients implement hybrid cloud environments. This was offset by declines in areas like on-premise DevOps and IT service management. Turning to profit, gross profit margin for Technology Services & Cloud Platforms was down 1 point year-to-year, consistent with last quarter’s performance. The PTI margin of 13.8% is up 2 points sequentially, and the year-to-year performance is also about 2 points better than last quarter. We’re yielding savings from actions we’ve taken and we continue to focus on delivering productivity to our clients. We’re investing to expand our cloud infrastructure, which is currently impacting our margin. With nearly 60 cloud centers across 19 countries, the IBM Cloud provides our clients with the flexibility to store data however and wherever they choose. We are also focused on scaling the IBM Services Platform with Watson that we announced in July. This is a delivery platform that is designed to identify and predict potential problems and self-heal. The platform will redefine service delivery and quality, providing significant competitive advantages to our clients. So to summarize Technology Services & Cloud Platforms, the revenue and profit declines this quarter were similar to last quarter. We continue to see momentum in cloud, grew signings double digits and improved our services backlog year-to-year performance. We’re continuing to invest in our cloud infrastructure and we are transforming our services delivery platform with Watson. In Systems, we had a strong quarter with double-digit revenue growth and margin expansion. Performance was driven by a combination of strong z14 acceptance, and growth in Storage. Power declined, consistent with where we are in that product cycle. Our Systems margin was up year-to-year and sequentially, as mainframe and storage margins grew, while Power margin was flat. IBM Z revenue grew 62% year-to-year on 33% MIPS growth, and margins expanded after a successful launch of the z14 program in mid-September. This success is due to the strong demand for technology that helps address the growing threat of global data breaches, and the need to operate within regulated environments. Our new z14 mainframe with its unprecedented encryption capabilities, encrypts all data associated with any application, cloud service or database all the time, without the possibility of human intervention. And that’s with no application change and no performance impact. So, the appeal is obvious, and we had good traction across a broad mix of industries and geographies. And across the z platform, we are addressing emerging workloads in areas like blockchain, machine learning, and new payment systems. For example, when banks are trying to figure out how to manage new requirements within the EU’s payment modernization initiative, they come to us. Given the critical nature of the European financial services backbone, IBM Z provides the necessary reliability, scalability and security, and that’s why we had key wins in instant payments this quarter. The Power revenue was down 8% year-to-year, driven by declines in UNIX, though UNIX high-end systems grew again. We continue to have good growth in Linux, and with double-digit growth in Linux workloads, Linux-on-Power now represents over 20% of our Power portfolio. Later this quarter, we will deliver our next-gen POWER9 to market, starting with two U.S. Department of Energy supercomputing centers. This is strong evidence of the importance of Power to the high-performance computing market, and we will roll out commercial POWER9 solutions throughout 2018. So in an era of cognitive and AI, where data is fundamental to our enterprise clients, Power is demonstrably better for Linux machine learning and deep learning workloads, the workloads of the future. And that’s why we’re committed to the Power platform. Storage hardware was up 4%, and as I said earlier, this is the third consecutive quarter of storage revenue growth. We had growth across our major hardware product areas, including in key midrange and high-end product lines, which grew double digits. Our all-flash array offerings once again grew strong double digits, in line with the high-growth market. And our Storage software, which is reported in Cognitive Solutions also had double-digit growth in Software Defined Storage, reflecting the shift in value to software. So to summarize Systems, our year-to-year revenue grew double-digits and gross and pre-tax margins expanded, with strong performance in z Systems. This reflects our focus on continually reinventing this portfolio to address new workloads. Turning to cash flow and the balance sheet, we had another good quarter. We generated $3.3 billion of cash from operations, excluding our financing receivables. After nearly $800 million in capital investments, we delivered $2.5 billion of free cash flow, and that’s up modestly, reflecting strong working capital performance and lower workforce rebalancing payments, as well as higher cash taxes year-to-year. We’re continuing to convert our net income to free cash flow at a high rate, with our free cash flow realization at 96% over the last 12 months. Through the first three quarters of the year, we’ve generated $6.2 billion of free cash flow, which is down just under $800 million. You’ll recall that in the first quarter, our free cash flow was down $1.2 billion year-to-year, driven entirely by the foreign cash tax refund we received last year. Now, with free cash flow growth in the second and third quarters, we’ve reduced the year-to-year decline. As we generate profit consistent with our EPS guidance and with a tailwind in both our workforce rebalancing payments and cash taxes in the fourth quarter, we continue to expect our full-year free cash flow to be relatively flat year-to-year. In terms of uses of cash, over the last nine months, we’ve returned $7.8 billion to our shareholders, including $4.1 billion in dividends and $3.7 billion to buy back almost 23 million shares. At the end of the third quarter, we had 926 million shares outstanding, and a 1.5 billion remaining in our buyback authorization. Looking at the balance sheet, we continue to have the strength and flexibility to support our business over the long-term. We ended the quarter with $11.5 billion in cash and total debt was $45.6 billion. Both are higher than year-end, driven by the timing of our term debt issuances. About two-thirds of our debt was in support of our financing business, and includes our first public debt issuance of $3 billion in the third quarter out of our newly reorganized financing entity. This business continues to be leveraged at a debt-to-equity ratio of 9 to 1. The credit quality of our financing receivables remained strong at 52% investment grade. That’s flat versus December and a point better than a year ago. And as always, we’ve included more information on our financing business in the supplemental charts in the back-up. So now let me wrap up with a quick summary of the third quarter and some comments on considerations for the fourth. 90 days ago, I talked about planting the flag to mark the beginning of an improvement of the trajectory of our business, which would result in a second half that was improved over the first. Now in the third quarter, we’ve improved our year-to-year revenue and margin trajectory. This was led by strong performance in our Cognitive Solutions and Systems segments. And our strategic imperatives revenue across our segments grew at 10%, reflecting our success in embedding cognitive and cloud into more of what we offer. As we look to fourth quarter, as always we’ve got a range of scenarios, especially when you consider the typical large transactional base in our fourth quarter. Last year, we increased revenue by $2.5 billion from third to fourth quarter. This year, we’d expect stronger sequential performance, due in part to the mainframe cycle, so perhaps $300 to $400 million more, and of course that quarter-to-quarter will depend on currency too. Now looking at gross margin, we’ve had good progression over the last couple of quarters, driven by mix and some moderation in the headwinds from investments. In the fourth quarter, again we have a number of scenarios, but all are consistent with the sequential improvement we’ve seen over the last few years, so an increase of 2.5 to 3.5 points in gross margin from third to fourth quarter. For expense, we’ve been driving efficiency in our spend base, and we’ll continue to do that. But keep in mind that with a weaker dollar, currency hedges will impact the expense line. And regarding IP income, we have a great list of opportunities and we expect to close some of them, but as always, we’re certainly not relying on all of them. And then finally, let me comment on tax. As we’ve discussed in the past, our tax rate reflects our mix of business, both country and product mix. As we enter the fourth quarter with a seasonally large transaction base, we continue to see an ongoing operational tax rate of 15%, plus or minus 3 points as the right range. And as you know, that’s not changed since we provided EPS guidance back in January. Remember, we widened the range in 2017 because of the tax reform discussions currently underway at a political level. In common with many companies, those tax reform discussions could still result in IBM taking planning actions this year. We also may have discrete tax items in the fourth quarter. At this point we don’t know if, or how much, and then how much will be absorbed by other actions. However, as we sit here today entering the fourth quarter, our views on tax remain unchanged. So you put all of this together, and we continue to expect to deliver at least $13.80 of operating earnings per share for 2017, and as I mentioned earlier, free cash flow that is consistent with last year. And with that, we’ll take your questions.

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. Tien-tsin Huang: 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

Patricia Murphy - Vice President of Investor Relations Martin Schroeter - Senior Vice President and Chief Financial Officer

Katy Huberty - Morgan Stanley Amit Daryanani - RBC Capital Markets Toni Sacconaghi - Bernstein David Grossman - Stifel Financial Wamsi Mohan - Bank of America Merrill Lynch Steve Milunovich - UBS Jim Suva - Citigroup James Schneider - Goldman Sachs Tien-tsin Huang - JPMorgan Keith Bachman - BMO Capital Markets

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 over the last 12 months was also up 10% to $34.9 billion, and now represents 45% of IBM. We’re embedding cloud and cognitive capabilities across our business, and our strategic imperatives, as we’ve said, are a signpost of the progress we’re making in helping our enterprise clients to extract value from data, and become digital businesses. And so our strategic imperatives aren’t separate businesses, but a view of the revenue across our segments that provide our clients with analytics, cloud, security, mobile and social capabilities. This quarter, our Cloud revenue was up 20%, and over the last 12 months has grown to a $15.8 billion revenue base, which represents 20% of IBM’s revenue. Our as-a-Service revenue was up 24% in the third, and we exited the quarter with a $9.4 billion annual run rate. We’re able to drive these results, because we’re focused on helping our enterprise clients transform their IT. Keep in mind, the IBM Cloud is built for the enterprise. It is the only cloud that integrates public, private, multi-cloud and traditional data centers through a single architecture and is designed for cognitive workloads. So as our clients look to use AI to extract value from data, Watson on the IBM Cloud is the AI platform for business, differentiated by vertical domain depth and in how it protects our clients’ data and insights. Because for enterprises, data matters, and industry matters. And that’s why we’ve built industry-specific cloud-based Cognitive Solutions in areas like oncology and life sciences in Watson Health, and risk and compliance in Watson Financial Services. They address new opportunity areas outside of traditional IT. Our analytics revenue includes these new vertical businesses, as well as established horizontal offerings, like DB2, that are being transformed, are high value, and play a critical role in our clients’ environments. In total, analytics revenue was up 5% this quarter to nearly $5 billion. So this business is large, and it’s growing. In security, we’ve recently embedded cognitive into many of our offerings. This quarter, across our segments, security grew about 50%, driven by our security software solutions and strong demand for the pervasive encryption capabilities in our new z14. The mainframe is a great example of a core platform that we’ve continually modernized, and now with new capabilities like machine learning on z and pervasive encryption, it’s been reinvented again for the cognitive and cloud era, as well as an ideal platform for blockchain. As we build and scale new businesses, partnerships and ecosystems play a critical role. And so in the third quarter, we continued to launch new blockchain partnerships and networks, including an initiative with a group of leading food retailers and suppliers including Walmart, Kroger, Dole, Nestle and Unilever to address food safety. And we’re partnering with UBS and several global banks to build a blockchain-based platform to support trade finance. In the area of big data, in partnership with Hortonworks, we announced new capabilities that allow data scientists to do big data analytics using IBM products on the Hortonworks data platform. And in the third quarter, we formed a new partnership with MIT to create the MIT-Watson AI lab. We’ll mobilize the talent of more than 100 AI scientists, professors and students to advance AI hardware, software and algorithms, and increase AI’s impact on industries and enterprises. So across our business, we’re embedding cloud and cognitive capabilities into our offerings, which is fueling the shift to strategic imperatives. In many cases, we’re building new businesses that address new markets, while in others we’re investing to reinvent existing businesses with these same technologies. This is what you see in our revenue and profit dynamics. So now, let me move on to our financial metrics for the quarter. Our revenue was $19.2 billion, and when you look at our revenue performance by geography, we had sequential improvement in the year-to-year performance in all three major geographic regions, so as I said earlier, broad-based improvement. EMEA revenue performance improved 3 points from last quarter, to down 1% in the third. We had year-to-year growth in Germany, France, Italy and Spain, mitigated by declines in the UK. We recently signed large services engagements to provide cloud and digital services to clients in the UK, Germany and Spain. I’ll touch on a couple of them later. Our Asia Pacific revenue growth improved nearly 4 points and was up 2% year-to-year, with good growth in Japan and China. The Americas year-to-year performance improved nearly a point, driven by the US. Looking at our margin performance, our gross margin was down 40 basis points year-to-year, which is another significant sequential improvement. Last quarter, we talked about the margin dynamics for the second half, and we said we’d get some improvement from mix and from productivity, which we did. And we said the impact from investments would moderate. So our margin came in as we said. Our operating expense was down 1% versus last year, with little impact from currency and acquisitions this quarter. Our expense dynamics reflect the continued efficiency we’re driving in our underlying spending base, while continuing to invest to build and reinvent our platforms and solutions. Included within the 1% reduction, we had about $220 million less IP income year-to-year, and absorbed an impact of about $100 million year-to-year in SG&A associated with some commercial disputes. Our operating pre-tax profit was $3.6 billion and pre-tax margin was 18.8%, which is down just 20 basis points year-to-year, and up sequentially. Our tax rate for the quarter reflects an ongoing operating effective tax rate of just under 15%, consistent with last quarter, and we had no discrete tax items in the quarter. On the bottom line, our operating EPS was $3.30, essentially flat year-to-year. We generated $2.5 billion of free cash flow, which is similar to last quarter and last year’s third quarter, and we continue to expect our free cash flow for the full-year to be relatively flat year-to-year. Over the last 12 months, our free cash flow of nearly $11 billion was 96% of our GAAP net income, and supports both a high-level of investment and shareholder returns. Now turning to our segments, Cognitive Solutions revenue was up 3%, and pre-tax income was up 5%, so better than balanced performance this quarter. Both Solutions Software and Transaction Processing Software grew 3% and we had growth in both our annuity content and our transactional businesses. Within our annuity content, our SaaS offerings had double-digit growth in revenue and signings again this quarter. And we also had continued growth in our software services, which support our solutions offerings through industry and product expertise. We also had good software transactional performance, as clients commit to the platform for the long term. Our Cognitive Solutions revenue growth is driven by organic performance, as we’ve wrapped on most of our acquisitions. And we continue to invest to combine organic and acquired content to build cloud-based cognitive offerings. Within Solutions Software, growth was led by offerings in security and analytics. Our analytics growth was broad-based, including Business Intelligence & Data Discovery, where we had triple-digit SaaS growth led by Cognos Analytics. We also had strong growth in data warehousing, where we’re continuing to reinvent these offerings. For example, in September, we launched our new unified data system, which leverages our DB2 technology and is built on IBM Power. Also in analytics, we had strong growth again this quarter in Watson, our Enterprise AI platform. Conversation API usage again had strong double-digit growth quarter to quarter. Clients have embedded cognitive into their workflows and are seeing compelling returns. For example, in January, the Royal Bank of Scotland launched Cora, leveraging both our conversation and discovery services. Cora now deflects nearly half of the calls from traditional channels while improving customer experience, significantly cutting down waiting times and freeing up time for call-center staff to deal with more complex problems, and we are benefitting from Cognitive ourselves. IBM’s client support teams use Watson to help drastically reduce response time on more than 3.5 million service requests per year. Watson is trained on 7,000 IBM products and provides instant resolutions, based on what it has learned from previous similar requests. Watson has contributed to a 30% reduction in problem determination time across our Technical Support Services business. We’re embedding cognitive into our Security offerings as well. Security software grew double digits this quarter, and this is clearly a hot market for us. We had strong growth across our security portfolio in areas such as endpoint protection, incident response and security intelligence, with offerings like Resilient and QRadar. Our clients using QRadar Advisor with Watson are seeing measurable results. For example, clients found threats 60 times faster than manual investigations, and complex analysis went from an hour to less than a minute. As you would imagine, nothing matters more than time in these situations. Acceleration in the number of cybersecurity threats, the increasing requirements of regulatory compliance, including the upcoming GDPR, or General Data Protection Regulation, and our collaboration with Cisco and other partners on threat intelligence drove strong demand this quarter. Looking at IoT, our revenue was up double digits this quarter. We introduced new offerings like IoT for Connected Products, as well as key enhancements around security and risk management. We signed nearly 40 new clients to the IoT Platform, including a shipping logistics provider, a global electronics components distributor, and a leading provider of wireless networking solutions. And the number of developers grew at a strong double-digit rate. As we’ve said, an industry lens is key to our cognitive strategy, and this quarter, Watson Health continued to drive double-digit growth, with strength in Government, Oncology and Life Sciences similar to last quarter. We continued to expand the number of patients touched by Watson across our global ecosystem, as well as expand the number of countries. We also had strong growth in Watson Financial Services, as clients look to evolve their financial systems to make better-informed risk and compliance decisions, as well as modernize their core systems, like their payment gateways. Turning to Transaction Processing Software, we had a strong quarter, with revenue up 3%, reflecting our clients’ ongoing long-term commitment and the value our platform provides to them. This portfolio predominately runs on-premise, mission critical workloads in industries like banking, airlines and retail running on z Systems. So for the Cognitive Solutions segment, we’re embedding cognitive, scaling platforms and building high-value vertical solutions. We grew revenue in the quarter, which drove total IBM software revenue growth, and we expanded the Cognitive Solutions pre-tax income margin. Global Business Services delivered $4.1 billion of revenue this quarter. The year-to-year performance is similar to last quarter, as we continue to transform the business. We’re investing to shift our practices to where we see the opportunity, which is around digital, cognitive, cloud and automation. Over the last 2.5 years, we’ve added tens of thousands of resources to these areas. We grew double digits in our strategic imperatives, and overall GBS signings grew for the third consecutive quarter. With modest growth in signings, it takes time for our progress to be reflected in revenue and profit. Consulting revenue grew 1%, led by our digital strategy and iX platform, which is up over 40%. The consulting backlog also returned to growth this quarter. IBM iX is helping clients digitally reinvent themselves. IBM iX was an early mover in the digital space, and we’ve built a global network where clients can co-create with us. We now have 36 studios around the world, which gives us unmatched reach. We recently announced the intention to acquire Vivant, a digital agency based in Australia. This adds to the acquisitions we did last year in Europe and North America to bring in new skills and rapidly expand our global iX capabilities. We’re also leveraging strategic partnerships and investing in emerging technologies. In the third quarter we signed a five-year collaboration with Volkswagen to develop new mobility services that will utilize our cloud and cognitive capabilities to create highly personalized digital experiences for drivers. We also launched our blockchain services practice that will include more than 1,500 consultants who can help enterprises implement blockchain-enabled business models. Application Management revenue declined 3%. We grew in the practices that help clients implement new cloud-centric architectures in their critical applications. We’re leveraging our incumbency to modernize their application suites by implementing cloud-based microservices and helping them build cloud-native applications into their environments. Overall performance was impacted by areas that are not as differentiated, where we are seeing pricing pressure and driving productivity for our clients. Turning to profit, our Global Business Services gross profit margin decline was similar to last quarter. The GBS PTI margin of 10.8% is up 3 points sequentially, and the year-to-year performance improved by over a point. The GBS margin has been impacted by the investments we’re making to drive our transformation. We are acquiring to bring in important new skills and scale them across the organization. We’re investing in the enablement of our practitioners, shifting resources to new areas, while also hiring top talent. The margin dynamics also reflect pricing and profit pressure in the more traditional IT services, such as back-office implementations of on-premise applications and parts of the Global Processing Services business. As we go forward, we are focused on improving our productivity with a streamlined practice model and new project management approaches. So in summary for GBS, the revenue and profit trajectory was similar to last quarter. Consulting returned to growth while Application Management decelerated. We continue to grow in our practices around cloud, analytics, and mobility services, and we’re investing in our skills to continue to drive our GBS transformation. Technology Services & Cloud Platforms generated $8.5 billion of revenue, with year-to-year performance similar to last quarter. We continue to grow revenue double digits in our strategic imperatives, led by cloud. The annual as-a-service run-rate for the segment is now $6.2 billion. With good momentum in our cloud offerings, we grew overall GTS signings by over 25%. Our total services backlog trajectory improved by 2 points compared to last quarter as we returned to backlog growth in Infrastructure Services. GTS continues to be the market share leader, and is nearly two-times the size of our largest competitor. Looking at the lines of business, Infrastructure Services revenue was down 5%. This reflects the fact that we haven’t yet wrapped on the year-to-year headwinds that we talked about earlier this year, and we’re not yet yielding the full benefit from some of the new contracts we signed in the first half. In addition, we’re shifting away from some lower value work. We had strong signings performance in Infrastructure Services this quarter, as clients look to implement hybrid cloud environments. They turn to the IBM Cloud, because it’s designed for data, AI, and security, and it’s the only cloud that integrates public, private, multi-cloud, and legacy data centers through a single architecture. For example, at BBVA, the second largest bank in Spain, we signed an agreement to transform their current infrastructure. This will create the foundation for them to move ahead with their cloud strategy. We’ll work with BBVA to optimize their infrastructure, while enabling them to maintain control of their data and operations. Technical Support Services revenue was down 2%. We’re focused on driving our multi-vendor support offerings, which provide our clients with a single source of expertise and visibility across different vendor solutions. For example, we are working with HSBC to support data center maintenance of banking locations across 60 countries. In the U.S., we are providing an integrated solution to Walgreens that includes retail analytics and IBM Cloud infrastructure to improve the efficiency of field service support at over 8,100 drug stores nationwide. And in South Korea, we’re deploying a multi-vendor support solution with Hana Financial Group to standardize the IT maintenance systems at three of Hana’s subsidiary groups. Looking at the software content within the segment, Integration Software revenue was down 3%. And within that, we continue to have strong growth in SaaS across the portfolio, as we help our clients implement hybrid cloud environments. This was offset by declines in areas like on-premise DevOps and IT service management. Turning to profit, gross profit margin for Technology Services & Cloud Platforms was down 1 point year-to-year, consistent with last quarter’s performance. The PTI margin of 13.8% is up 2 points sequentially, and the year-to-year performance is also about 2 points better than last quarter. We’re yielding savings from actions we’ve taken and we continue to focus on delivering productivity to our clients. We’re investing to expand our cloud infrastructure, which is currently impacting our margin. With nearly 60 cloud centers across 19 countries, the IBM Cloud provides our clients with the flexibility to store data however and wherever they choose. We are also focused on scaling the IBM Services Platform with Watson that we announced in July. This is a delivery platform that is designed to identify and predict potential problems and self-heal. The platform will redefine service delivery and quality, providing significant competitive advantages to our clients. So to summarize Technology Services & Cloud Platforms, the revenue and profit declines this quarter were similar to last quarter. We continue to see momentum in cloud, grew signings double digits and improved our services backlog year-to-year performance. We’re continuing to invest in our cloud infrastructure and we are transforming our services delivery platform with Watson. In Systems, we had a strong quarter with double-digit revenue growth and margin expansion. Performance was driven by a combination of strong z14 acceptance, and growth in Storage. Power declined, consistent with where we are in that product cycle. Our Systems margin was up year-to-year and sequentially, as mainframe and storage margins grew, while Power margin was flat. IBM Z revenue grew 62% year-to-year on 33% MIPS growth, and margins expanded after a successful launch of the z14 program in mid-September. This success is due to the strong demand for technology that helps address the growing threat of global data breaches, and the need to operate within regulated environments. Our new z14 mainframe with its unprecedented encryption capabilities, encrypts all data associated with any application, cloud service or database all the time, without the possibility of human intervention. And that’s with no application change and no performance impact. So, the appeal is obvious, and we had good traction across a broad mix of industries and geographies. And across the z platform, we are addressing emerging workloads in areas like blockchain, machine learning, and new payment systems. For example, when banks are trying to figure out how to manage new requirements within the EU’s payment modernization initiative, they come to us. Given the critical nature of the European financial services backbone, IBM Z provides the necessary reliability, scalability and security, and that’s why we had key wins in instant payments this quarter. The Power revenue was down 8% year-to-year, driven by declines in UNIX, though UNIX high-end systems grew again. We continue to have good growth in Linux, and with double-digit growth in Linux workloads, Linux-on-Power now represents over 20% of our Power portfolio. Later this quarter, we will deliver our next-gen POWER9 to market, starting with two U.S. Department of Energy supercomputing centers. This is strong evidence of the importance of Power to the high-performance computing market, and we will roll out commercial POWER9 solutions throughout 2018. So in an era of cognitive and AI, where data is fundamental to our enterprise clients, Power is demonstrably better for Linux machine learning and deep learning workloads, the workloads of the future. And that’s why we’re committed to the Power platform. Storage hardware was up 4%, and as I said earlier, this is the third consecutive quarter of storage revenue growth. We had growth across our major hardware product areas, including in key midrange and high-end product lines, which grew double digits. Our all-flash array offerings once again grew strong double digits, in line with the high-growth market. And our Storage software, which is reported in Cognitive Solutions also had double-digit growth in Software Defined Storage, reflecting the shift in value to software. So to summarize Systems, our year-to-year revenue grew double-digits and gross and pre-tax margins expanded, with strong performance in z Systems. This reflects our focus on continually reinventing this portfolio to address new workloads. Turning to cash flow and the balance sheet, we had another good quarter. We generated $3.3 billion of cash from operations, excluding our financing receivables. After nearly $800 million in capital investments, we delivered $2.5 billion of free cash flow, and that’s up modestly, reflecting strong working capital performance and lower workforce rebalancing payments, as well as higher cash taxes year-to-year. We’re continuing to convert our net income to free cash flow at a high rate, with our free cash flow realization at 96% over the last 12 months. Through the first three quarters of the year, we’ve generated $6.2 billion of free cash flow, which is down just under $800 million. You’ll recall that in the first quarter, our free cash flow was down $1.2 billion year-to-year, driven entirely by the foreign cash tax refund we received last year. Now, with free cash flow growth in the second and third quarters, we’ve reduced the year-to-year decline. As we generate profit consistent with our EPS guidance and with a tailwind in both our workforce rebalancing payments and cash taxes in the fourth quarter, we continue to expect our full-year free cash flow to be relatively flat year-to-year. In terms of uses of cash, over the last nine months, we’ve returned $7.8 billion to our shareholders, including $4.1 billion in dividends and $3.7 billion to buy back almost 23 million shares. At the end of the third quarter, we had 926 million shares outstanding, and a 1.5 billion remaining in our buyback authorization. Looking at the balance sheet, we continue to have the strength and flexibility to support our business over the long-term. We ended the quarter with $11.5 billion in cash and total debt was $45.6 billion. Both are higher than year-end, driven by the timing of our term debt issuances. About two-thirds of our debt was in support of our financing business, and includes our first public debt issuance of $3 billion in the third quarter out of our newly reorganized financing entity. This business continues to be leveraged at a debt-to-equity ratio of 9 to 1. The credit quality of our financing receivables remained strong at 52% investment grade. That’s flat versus December and a point better than a year ago. And as always, we’ve included more information on our financing business in the supplemental charts in the back-up. So now let me wrap up with a quick summary of the third quarter and some comments on considerations for the fourth. 90 days ago, I talked about planting the flag to mark the beginning of an improvement of the trajectory of our business, which would result in a second half that was improved over the first. Now in the third quarter, we’ve improved our year-to-year revenue and margin trajectory. This was led by strong performance in our Cognitive Solutions and Systems segments. And our strategic imperatives revenue across our segments grew at 10%, reflecting our success in embedding cognitive and cloud into more of what we offer. As we look to fourth quarter, as always we’ve got a range of scenarios, especially when you consider the typical large transactional base in our fourth quarter. Last year, we increased revenue by $2.5 billion from third to fourth quarter. This year, we’d expect stronger sequential performance, due in part to the mainframe cycle, so perhaps $300 to $400 million more, and of course that quarter-to-quarter will depend on currency too. Now looking at gross margin, we’ve had good progression over the last couple of quarters, driven by mix and some moderation in the headwinds from investments. In the fourth quarter, again we have a number of scenarios, but all are consistent with the sequential improvement we’ve seen over the last few years, so an increase of 2.5 to 3.5 points in gross margin from third to fourth quarter. For expense, we’ve been driving efficiency in our spend base, and we’ll continue to do that. But keep in mind that with a weaker dollar, currency hedges will impact the expense line. And regarding IP income, we have a great list of opportunities and we expect to close some of them, but as always, we’re certainly not relying on all of them. And then finally, let me comment on tax. As we’ve discussed in the past, our tax rate reflects our mix of business, both country and product mix. As we enter the fourth quarter with a seasonally large transaction base, we continue to see an ongoing operational tax rate of 15%, plus or minus 3 points as the right range. And as you know, that’s not changed since we provided EPS guidance back in January. Remember, we widened the range in 2017 because of the tax reform discussions currently underway at a political level. In common with many companies, those tax reform discussions could still result in IBM taking planning actions this year. We also may have discrete tax items in the fourth quarter. At this point we don’t know if, or how much, and then how much will be absorbed by other actions. However, as we sit here today entering the fourth quarter, our views on tax remain unchanged. So you put all of this together, and we continue to expect to deliver at least $13.80 of operating earnings per share for 2017, and as I mentioned earlier, free cash flow that is consistent with last year. And with that, we’ll take your questions.

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. Q - Katy Huberty: 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. A - Martin Schroeter: 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. A - Patricia Murphy: 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. Q - Amit Daryanani: 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? A - Martin Schroeter: 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. A - Patricia Murphy: 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. Q - Toni Sacconaghi: 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. A - Martin Schroeter: 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. A - Patricia Murphy: 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. Q - David Grossman: 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? A - Martin Schroeter: 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. A - Patricia Murphy: 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. Q - Wamsi Mohan: 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. A - Martin Schroeter: 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. A - Patricia Murphy: 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. Q - Steve Milunovich: 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? A - Martin Schroeter: 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. A - Patricia Murphy: 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. Q - Jim Suva: 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? A - Martin Schroeter: 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. A - Patricia Murphy: 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. Q - James Schneider: 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? A - Martin Schroeter: 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. A - Patricia Murphy: 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. Q - Tien-tsin Huang: 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. A - Martin Schroeter: 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. A - Patricia Murphy: 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. Q - Keith Bachman: 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? A - Martin Schroeter: 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.