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

Thank you. This is Patricia Murphy, Vice President of Investor Relations for IBM, and I want to welcome you to our Fourth Quarter 2019 Earnings Presentation. I’m here with Jim Kavanaugh, IBM’s Senior Vice President and Chief Financial Officer. We’ll post today’s prepared remarks on the IBM investor website within a couple of hours, and a replay will be available by this time tomorrow. Some comments made in this presentation may be considered forward looking under the Private Securities Litigation Reform Act of 1995. These statements involve factors that could cause our actual results to differ materially. Additional information about these factors is included in the company’s SEC filings. Our presentation also includes non-GAAP measures, to provide additional information to investors. For example, consistent with last quarter’s format, we present revenue growth at constant currency throughout the presentation. In addition, to provide a view consistent with our go-forward business, we’ll focus on constant currency growth adjusting for the divested businesses for the impacted lines of total revenue, cloud and our geographic performance. We have provided reconciliation charts for these and other non-GAAP measures at the end of the presentation, and in the 8-K submitted to the SEC. I also want to remind you that IBM’s revenue, profit and earnings per share reflect the impact of purchase accounting and other transaction-related adjustments associated with the acquisition of Red Hat. These adjustments and charges are primarily non-cash. So, with that, I’ll turn the call over to Jim.

Thanks Patricia, and thanks to all of you for joining us. We had a solid finish to 2019. In the fourth quarter, we grew revenue at actual rates, and it was up 3% at constant currency, excluding divestitures. Our operating gross margin was up over two points, which is the best margin expansion in some time. We delivered $4.2 billion of operating net income, and $6 billion of free cash flow, and we had $4.71 of operating earnings per share. We also reduced our debt balance by another $3 billion in the quarter, for a total reduction of $10 billion since the end of June. This caps off a year with $77 billion of revenue, $12.81 of operating earnings per share, and about $12 billion of free cash flow, in-line with our expectations. In 2019, we took a number of actions to strengthen our foundation for the next chapter of our clients’ digital reinventions. We acquired Red Hat, with the number one Linux operating system, RHEL, and the leading hybrid cloud platform, OpenShift. We modernized our software portfolio, making it cloud-native and optimized for OpenShift. We announced the industry’s first public cloud designed specifically for financial services. We expanded our services offerings and skills for the cloud journey, including consulting and technology services for Red Hat and multi-cloud management. We expanded the reach of our Watson AI offerings, and we are leading the industry in our approach to trust and transparency for data and AI. We continued to deliver innovation in areas like our new z15 mainframe and quantum. And we divested select software and services businesses as we continue to prioritize our investments and optimize our portfolio. With 3% revenue growth, we’ve started to see the benefits in our fourth quarter results. Cloud and Cognitive Software revenue was up 9%. We had growth in all three lines of business, reflecting demand across our software portfolio. We had good adoption of our Cloud Paks, continued growth in security and Red Hat again posted strong performance. In Global Business Services, we had continued growth in consulting and in application monetization projects, as we help our clients on their digital journeys. We’re also seeing this in our GBS signings this quarter, including acceleration in new Red Hat engagements. Global Technology Services revenue was down 4%, in line with the expectations we discussed last quarter. We expanded Global Technology Services gross margin, consistent with our focus on managing the business for margin and profit. And in Systems, we had a good start to our z15 cycle and growth in high-end storage, resulting in double-digit revenue growth and gross margin expansion in the segment. Across our segments, our Cloud revenue growth improved to 23% this quarter, and our cloud revenue for the year was $21 billion. By leveraging our technology, incumbency and expertise to help our clients with their journeys to cloud, it now represents 27% of our revenue. We know there’s a lot of interest in our hybrid cloud approach, including Red Hat, so I’ll focus on that up front. As we have said, the next chapter of cloud will be driven by mission-critical workloads managed in a hybrid, multi-cloud environment. This will be based on a foundation of Linux, with containers and Kubernetes. This quarter we had strong performance in RHEL and OpenShift. Red Hat’s normalized revenue was up 24%, eclipsing a billion dollars in a quarter for the first time. In August, we introduced Cloud Paks, cloud-native software that simplifies deployment, reduces operational costs, and allows clients to build once and run anywhere. Cloud Paks bring together IBM middleware, AI, management and security, and Red Hat’s OpenShift platform. Our strong performance in Cloud Paks this quarter is an example of the synergy from the IBM and Red Hat combination. As we look forward, the largest hybrid cloud opportunity is in services, advising clients on architectural choices, moving workloads, building new applications and of course managing them. With IBM Services’ expertise in digital reinventions and managing mission-critical workloads, we are well positioned to help our clients on this journey. And now in the fourth quarter, demand for our cloud capabilities continue to ramp and we’re starting to realize the synergies across IBM and Red Hat. We see it in our total cloud revenue, which as I said was up 23%, and we see it in our combined software revenue growth of 9%. Across GBS and GTS, we nearly doubled the number of new services engagements leveraging Red Hat versus last quarter. We’re continuing to expand our client base, and now have over 2,000 clients using Red Hat and IBM container solutions. And we doubled the number of Red Hat large deals versus the previous quarter, with 21 customers with deals greater than $10 million. And as I said, Red Hat’s normalized revenue is up 24%. Within that, Infrastructure revenue, which is predominantly RHEL, was again up double-digits, and a point higher than last quarter’s rate. We’re continuing to take share with RHEL as clients put more of their enterprise workloads on Linux. Revenue in Application Development and emerging technologies was up over 50% this quarter, driven by OpenShift and Ansible. As I mentioned, IBM’s Cloud Paks include the OpenShift platform, and so as we sell Cloud Paks, this drives additional Red Hat OpenShift revenue. The transactional nature of Cloud Pak sales accelerated the revenue growth of OpenShift and total Red Hat, reflecting IBM’s seasonally strongest quarter. Our partners also see the value of IBM and Red Hat. For example, we’re expanding IBM’s partnership with Workday, one of our most important enterprise-wide business platform providers. As Workday grows, it has committed to using the Red Hat portfolio as a key component of its service delivery infrastructure. Workday is also expanding its use of the IBM Cloud. We’re also extending our partnership with Box. Box has chosen Red Hat to help power its IT infrastructure and Watson as its preferred AI provider for intelligent business processes. IBM and Box are also working together to deliver joint solutions focused on governance, security and AI. And so, we’re off to a great start with Red Hat, with solid revenue trajectory and expanding client base, both good indicators of our clients’ confidence in the value of IBM and Red Hat together. So, let me turn to IBM’s key financial metrics. Similar to last quarter, IBM’s revenue, profit, and operating earnings per share reflect the impact of Red Hat’s non-cash, transaction-related activity and adjustments. Our revenue of $21.8 billion was up more than $3.7 billion sequentially. That’s above the high-end of the range we discussed in October. Strong transactional performance drove our 3% year-to-year revenue growth. With the contribution from our high-value software and systems, our operating gross margin was up 230 basis points, and our gross profit dollars were up 5%. Our operating expense was up 15%, reflecting the impact of Red Hat, and significant investments we’re making to strengthen our foundation for chapter two, and deliver sustainable revenue growth. The majority of the increase, 10 of the 15 points, is driven by acquisitions and divestitures. This includes Red Hat’s operational spending and higher interest expense associated with the incremental debt we took on. The 10-point increase also reflects a year-to-year benefit from divested businesses, including a gain of about $135 million associated with a divestiture completed in the fourth quarter, but to be clear, the benefit from the divestiture gain is more than offset by the investments we’re making in innovation and in go-to-market capabilities. Over the last couple of quarters, we’ve had higher spending for our z15 launch, for the containerization of our software, and for research in areas like quantum. And you see that in higher base expense across SG&A, research and development, which together with lower IP income drove 4 points of our expense increase. Our operating tax rate in the quarter reflects a full-year rate of about 9%, versus the all-in operating tax rate of 9% to 10% we previously discussed. Looking at our free cash flow, as I said earlier, we generated $6 billion in the quarter, and nearly $12 billion for the year. That’s 126% of GAAP net income. Our strong cash generation and focus on capital allocation leaves us with a stronger balance sheet, ending the year with a cash balance of about $9 billion, and an improved debt profile with $10 billion of debt reduction in the second half. So, now I’ll turn to the segment results, starting with Cloud and Cognitive Software, which was up 9% this quarter. We had growth across all three lines of business of Cloud and Data Platforms, Cognitive Applications, and Transaction Processing Platforms. And cloud revenue in the segment was up over 75%, demonstrating good adoption of our hybrid cloud solutions, including Red Hat and Cloud Paks. Looking at the business areas, Cloud and Data Platforms revenue was up 20% this quarter. This is one area we’re starting to see the synergies of bringing IBM and Red Hat together. We had broad-based traction across the suite of Cloud Paks that addresses workloads from automation to data to integration. Clients are realizing the benefits of hybrid cloud with this containerized middleware and data platform software portfolio, including faster deployment and improved automation. Cognitive Applications grew this quarter, reflecting the strength of our AI led software solutions, including areas like Security and IoT. We are continuing to drive new innovations in these areas. In November, we launched the Cloud Pak for Security, and early client reaction has been positive. This offering allows clients to integrate their security tools and connect to existing data sources, enabling them to resolve security incidents more quickly, using open standards. This is the way we believe companies will effectively handle security in the hybrid cloud era and get more value for what they’ve already invested in cybersecurity. In IoT, we announced Maximo Asset Monitor. This is a new AI-powered monitoring solution designed to help maintenance and operations leaders better understand and improve the performance of their high-value physical assets. This new offering extends the Maximo suite, deployed in nearly 100 countries and recognized by IDC as a leader for Enterprise Asset Management applications. And then in Transaction Processing Platforms, revenue also grew this quarter. This performance reflects the value we provide clients managing critical workloads, and their preference for predictability in IT spend. While not directly correlated, new innovation, like the z15 mainframe, bolsters clients’ confidence and drives commitment to our platform for the longer-term. Looking at the profit for this segment, the decline in pre-tax margin was driven by the purchase accounting impacts from the Red Hat acquisition. We are pleased with the momentum in Cloud and Cognitive Software in 2019. Revenue was up 6% for the year, driven by the hybrid cloud strategy, modernization of our software portfolio and the strength of IBM and Red Hat together. Moving to Global Business Services, our revenue was flat in the quarter, and up for the year. In GBS, we bring together industry and technical expertise to help clients with their digital reinventions. As we enter chapter two, clients are making architectural choices and embarking on application-led transformations. We’ve been investing in offerings and capabilities to help advise clients, and move their applications to a hybrid multi-cloud. Against this backdrop, our consulting revenue grew 4%, driven by services that enable each phase of our clients’ digital journey. We again had growth in application modernization and development, next-generation enterprise applications like S/4 Hana and Salesforce, and in offerings that use AI to unlock new opportunities and realize productivity improvements. We see this at ExxonMobil, where GBS iX partnered with the client to create its recently announced ExxonMobil Rewards+, the all-in-one loyalty and payment application, which is hosted on the IBM Cloud. Our Application Management performance reflects continued revenue growth across the offerings that build and manage cloud applications. The year-to-year decline in AMS reflects strong prior year performance, driven by the achievement of significant milestones across a few accounts. In Global Process Services, revenue declined, as demand is shifting from traditional BPO offerings to new business platforms around intelligent workflows. Overall, we had good signings performance across all three lines of business in GBS, with strong demand in digital strategy and iX, cloud application development and modernization, and offerings around intelligent workflows. We more than doubled our Red Hat signings sequentially and had 50 new client engagements in the quarter with companies such as Honda, Toyota, and Vodafone. Turning to profit, GBS gross margin was 27%. While this is flat year-to-year, we had margin contribution from yield on our contract delivery improvements, mix shift to higher value content, and currency benefit from leveraging our global delivery resource footprint. This was offset by investments we’re making in capacity and offerings to capture the market opportunity. Overall, GBS had another solid year, with full-year revenue growth of 2% and gross margin expanding by almost a point. In Global Technology Services, revenue declined 4%, consistent with our expectations as we came into the quarter. We again had year-to-year declines due to lower client business volumes, impacting some of the more traditional labor-based managed services. We are taking actions to accelerate the shift to higher value segments of the market opportunity. We are introducing new managed services offerings for public and private cloud, in areas like cybersecurity, data management, and hybrid orchestration. We are investing in joint services offerings across GBS and GTS, and deploying joint go-to-market capability, as clients look for solutions across applications and infrastructure. We are expanding our cloud data center footprint, and we are taking structural actions to improve our cost competitiveness, while deploying a more asset-based delivery model. Our incumbency is a huge differentiator as the shift of mission-critical workloads to the cloud accelerates, given our intimate knowledge of our clients’ industry, business, and regulatory requirements. An example is the first financial services-ready public cloud that I mentioned earlier. We developed this, in collaboration with Bank of America, leveraging our knowledge of the financial services industry environment to address the requirements for regulatory compliance, security, and resiliency. We continued to have solid growth in our cloud offerings in GTS, with 13% growth in cloud revenue and double-digit growth in cloud signings. This quarter, clients such as Banco Sabadell and Broadridge are turning to IBM to enable their transition to cloud. At Banco Sabadell, IBM will modernize the bank’s IT environment. We’re bringing together IBM Services and Red Hat OpenShift to deploy new cloud-native applications and modernize existing ones, while meeting the bank’s security and regulatory requirements. And, at Broadridge, we are moving their mission-critical workloads to the cloud. This solution will leverage our deep financial services industry expertise and open source capabilities to allow Broadridge to provide industry-leading solutions. Turning to profit, we had good gross margin performance in GTS. Our year-to-year gross margin expansion of 20 basis points was driven by continued scale out of our public cloud, the mix of our portfolio, and our productivity actions. We had the largest sequential improvement in pre-tax margin in some time. In Systems, revenue was up 16% this quarter. Growth in IBM Z and Storage was mitigated by a decline in Power. IBM Z was up a strong 63%. The performance reflects our first full quarter of z15, and demonstrates the client demand for technology that addresses data privacy and resiliency, across hybrid cloud. We shipped the highest MIPs in history this quarter, driven by growth in new workloads. And we’ve already seen broad adoption of the new mainframe across a number of industries and countries. For example, we see large financial institutions migrating their global mainframe footprint to z15 as a critical backbone of their environment and cloud-native strategy. Cloud-native development simplifies building new applications and modernizing existing ones. This gives developers a consistent way to deploy their applications across public and private clouds, while taking advantage of the underlying performance, resiliency, and security of IBM Z. And in October, we announced Red Hat OpenShift for IBM Z, bringing together the industry’s most comprehensive enterprise container and Kubernetes platform with the enterprise server platforms of IBM Z and Linux One. With these unique innovations, IBM Z continues to deliver a high-value, secure, and scalable platform for our clients. In the fourth quarter, Power declined. I’ll remind you that last year we launched our next generation POWER9 processors in the high-end, as well as completed the roll-out of our supercomputers for the U.S. Department of Energy. Storage revenue was up 3%, led by growth in the high-end. In November, we launched the next generation high-end storage system, DS8900. This new system, tightly integrated with the z15 mainframe, offers industry-leading response times, availability and pervasive end-to-end encryption. Looking at profit, our Systems pre-tax margin was up more than five points, reflecting the benefit from new hardware launches. New innovation is fundamental to this segment, and we’ve accomplished a lot this year with the release of both the new z15 mainframe and DS8900 high-end storage. Now turning to cash, we generated $6.7 billion of cash from operations, excluding our financing receivables, and $6 billion of free cash flow. This capped off a year with $14.3 billion of cash from operations, also excluding financing receivables. Our net capital expenditures were $2.4 billion. The year-to-year decline reflects our strategy to de-emphasize lower value content across our services and financing portfolios. It also includes a benefit from real estate sales, which reduced our net CapEx. We generated free cash flow of $11.9 billion in 2019, in-line with our view from the beginning of the year. And our free cash flow realization was 126%. I’ll remind you our free cash flow reflects a few headwinds we’ve discussed, including the headwind in cash taxes, predominantly in the second half, the impact from Red Hat, including pre-closing financing costs, and the impacts of actions we’ve taken on our portfolio. Looking at uses of cash, of course our largest was the acquisition of Red Hat. We also returned over $7 billion to shareholders this year. This includes $5.7 billion in dividends. We’ve now increased our dividend per share for 24 consecutive years, and we remain committed to growing our dividend. We also spent $1.4 billion on share repurchases prior to the closing of Red Hat. Looking at the balance sheet, we ended the year with a cash balance of $9 billion. That’s down $3 billion from a year ago, when we were increasing our cash balance in advance of the Red Hat acquisition. Now, let me spend a minute on our debt profile. With the additional debt we took on to fund the Red Hat transaction, we had $73 billion in debt at the end of June, a combination of Global Financing debt, and non-financing, or what I’ll call core debt. We suspended our share repurchases at the time of the Red Hat acquisition, allowing us to focus our strong cash generation on debt repayment. In the fourth quarter, we reduced our debt by $3 billion, contributing to a $10 billion reduction in IBM’s core debt since June. Our total debt now stands at $63 billion, of which core debt is $38 billion. This puts us on track to achieve a leverage ratio consistent with a mid to high single-A rating within a couple of years. I also want to comment on our Global Financing debt, which is fully supported by financing assets, with a leverage ratio of 9 to 1. While there is no meaningful change to debt levels in the second half, we reduced our Global Financing debt by $6.5 billion since the beginning of the year. In February, we announced the wind down of our OEM commercial financing operations, which we essentially completed by the end of the year. In addition to reducing our debt levels, this improved the overall credit quality of our receivables, which ended the year at 62% investment grade. And as we typically do in January, I want to provide an update on the performance of our retirement-related plans. Our U.S. plan has been frozen since 2008, and over the last several years, we’ve moved our asset base to a lower risk, lower return profile. We had strong returns this year, with just under 15% return on assets, well ahead of our expected returns. At the end of 2019, in aggregate our worldwide qualified plans are funded at 102%, with the U.S. at 107%, that’s up 3 and 2 points, respectively, from a year ago. You can see our retirement-related plans continue to be well funded. Now, let me wrap up with a few comments on 2019, and how this positions us for 2020. We’ve been focused on the next chapter of our clients’ digital reinventions. Up front, I talked about what we’ve done in 2019 to strengthen our foundation for chapter two. We acquired Red Hat, modernized our software portfolio, and brought these together to create the leading hybrid cloud platform. We are introducing joint GBS and GTS offerings to help clients on their cloud journeys. We brought new innovations to market, I mentioned the Cloud Paks, the financial services public cloud, z15 and high-end storage. We also have a leadership position in quantum, and again we’re the leader in U.S. patents. At the same time, we divested some businesses that weren’t important to our success in chapter two. And now in the fourth quarter, we had good transactional performance across our high-value software and systems. We’re starting to realize the synergies from the combination of IBM and Red Hat in Cloud Paks, in services engagements, and in Red Hat itself. And in services, we’re seeing good growth across GBS and GTS in the services to advise, migrate, build and manage hybrid cloud environments, along with some pressure in the traditional labor-based services. All together, we delivered revenue growth of 3% this quarter. With our high value mix and focus on productivity, we expanded our gross margin. And we had strong free cash flow generation. With this trajectory, in 2020 we expect to grow revenue, operating earnings per share and free cash flow, and expand operating gross margin. Within that, we’ll maintain a high level of investment, focused on hybrid cloud and data and AI capabilities. We’ll drive productivity and take structural actions, especially in our GTS business. And remember, we’ll continue to face year-to-year headwinds from the divested businesses, especially in the first half, and our P&L will also still have an impact from the Red Hat non-cash purchase accounting adjustments, though less than 2019. Looking at tax, we expect an operating tax rate in the range of 7% to 9%. Like 2019, that’s an all-in rate, including an estimate of discrete items. Put all of this together, we expect to deliver at least $13.35 of operating earnings per share for the year. Turning to free cash flow, we expect about $12.5 billion in 2020. Within that, we’re expecting growth in CapEx as we continue to build out cloud capacity. And as we said back in August, we expect Red Hat to be accretive to free cash flow, and that’s net of the incremental interest expense. With that, let me turn it back over to Patricia for the Q&A.

Thank you, Jim. Before we begin the Q&A, I’d like to mention a few items. First, I’ll remind you that the year-to-year growth rates we’re providing today for Red Hat are normalized, to provide comparability to Red Hat’s historical performance. Second, we have supplemental charts at the end of the slide deck that provide additional information on the quarter and the full year. And finally, as always, I’d ask you to refrain from multi-part questions. So, Sheila, let’s open it up for questions.

Thank you. [Operator Instructions] Our first question comes from Wamsi Mohan with Bank of America. Your line is open.

Yes. Thank you. Jim, nice to see the strong overall revenue performance and Red Hat performance as well. I know you don't explicitly guide revenues, but can you help at a high-level bridge the big items that we should be thinking about in 2020 relative to 2019 for revenues? And then do the same for free cash flow. I know you touched a little bit on CapEx, but if you could maybe break it down between core business, Red Hat, tax, pension, what are some of the larger puts and takes that we should think about embedded in that $500 million increase year-to-year? That would be great. Thank you.

Okay. Thank you, Wamsi, and I appreciate the compliment to all the IBM-ers around there, who have been working hard. Let me start out as we always talk about our guidance. It's the first time we're coming out with 2020 guidance overall. And as we always do, we take into account multiple scenarios trajectory of our business, operational indices, business plans, etc., and all that gives us confidence in the expectation we went out with regards to $13.35 at least on EPS, and approximately $12.5 billion, but there are a couple of things underneath that, and some of them, which you talked about, let me just share some of the color. So, first around currency. Currency, we expect on a full-year to be pretty de minimis between 0 point and 1 point of a headwind, a little bit different what we've been challenged with the last [few years], but most of that's going to be here in the first half and in the first quarter at current spot rates. Second, we've done a lot of work around our portfolio optimization, divest the non-core assets, that is going to be about 1-point impact on the year and a 2-point impact in the first half, very similar to what we just finished in second half of the year. Three, we're continuing to deal with the deferred revenue impairment and we were very transparent on Investor Day, we gave you the four-quarter roll out, and that's predominantly a first half statement, second half it's lessened. And four, embedded in our results as we talked about in prepared remarks, we'll go through. In GTS, we are going to take aggressive structural actions to reposition the business overall. I would tell you, if you look at the last few years, that will probably be on the high-end of that. And when you take a look at our guidance on tax, which again to be fully transparent 7% to 9%, that is all-in including discretes, we expect a tax discrete benefit in the first quarter that will pretty much offset the charge, and on a full-year basis be immaterial. So, that's some of the color behind the overall. Now, when you talk about the full-year, I mean, you look at our guidance in the full-year, we will grow revenue, we will grow operating earnings per share, we will grow free cash flow, and we will continue to expand margins nicely. And embedded in that, will be continued acceleration of our cloud business and continued good growth out of the IBM plus Red Hat together.

Okay, Wamsi. Let's go to the next question, please.

Thank you. Our next question comes from Tien-tsin Huang with JP Morgan. Your line is open. Tien-tsin Huang: Hi, thanks, good afternoon to you guys. Just – I guess I'm also intrigued by the revenue growth outlook for 2020. And again, I know you can't get too much on segment thoughts, but with GTS signings down, the short cycle stuff was an issue last quarter. I'm curious, just your visibility or confidence in delivering the revenue growth against that what you see with GTS, again recognizing that you also have some structural actions to do.

Yes, well, let's talk about since we got asked twice, and again, Tien-tsin, thank you for the question. Overall, as I said, at the IBM level, we expect to grow revenue, operating earnings per share, free cash flow and continue to expand margins. Within that, when you look at it by segment, let me give you some of the colors from a segment. Number one, we continue to have a very strong portfolio and offering line-up in our software base of business, complementing now with the Red Hat acquisition, you're seeing in our results the synergistic value we're bringing to our clients, bringing IBM and Red Hat together, and we see consistent performance in that segment. GBS overall, we actually finished pretty strong in GBS, very strong signings in the quarter. We returned that business for the first time in years back to backlog growth and we're pretty optimistic about accelerated growth in 2020. GTS, to your question, we talked about 90 days ago, fourth quarter played out pretty consistent with the guidance we gave 90 days ago. And when you look at our backlog position where we ended, and you look into 2020, we are going to take actions around high-value portfolio optimization, around offerings, around go-to-market models, around incentives and changing our operating model in light of what we're seeing in the marketplace, and I would see an improving trend in GTS as we move through the year predominantly in the second half. And then if you look at Systems, we're off to a very good start. That segment has always been predicated based on bringing new innovation and value to market. Our z15 and new high-end storage, which we brought the market, both grew nicely. Value proposition resonating. We expect a very strong first half in both of those, and we'll see as we get into the second half, how this cycle plays out.

Thank you, Tien-tsin, for the question. Sheila, can we please go to the next question?

Our next question comes from Matt Cabral with Credit Suisse. Your line is open.

Yes. Thank you. Wondering if you could talk a little bit more about the performance in GBS, and in particular dig into what's driving the divergence between consulting and apps management. And then related to that, just if you can walk through what drove the pressure on PTI margins for the segment in the fourth quarter and how we should think about profitability there going forward?

Sure. Thanks, Matt. I appreciate the question. GBS overall, first of all, we talked about 90 days ago, we were facing a very difficult compare. When you look at fourth quarter last year, I think I'm going off memory, we grew high single-digit overall, we were double-digit consulting growth, we returned application management to mid-single-digit growth. And we talked at that time that we had done a lot of work about improving the quality of our delivery and we had achieved significant milestones that were contributing to fourth quarter last year. And by the way, if I remember correctly, our pre-tax income was up 30% to 40% fourth quarter last year. So, we knew what we were entering here in the fourth quarter, but I'll tell you, overall, I couldn't be more pleased with the GBS space of business for the full-year, second year in a row, consistent revenue growth. We grew operating gross profit margins by 90 basis points. We continue to reposition this business to capture the growth in our clients' digital reinventions and journey to cloud, we're seeing nice acceleration in both. And as I just said on the prior question, we finished the year pretty strong in GBS with regards to signings growth, returning to overall backlog back to growth and we see an accelerated GBS positioning going into 2020. And to your question, that's really led by, you know we've talked about the rationale of Chapter 2 around hybrid cloud, around a large portion of mission critical workloads that are going to move to the cloud as we move forward and hybrid is going to be that destination. I think what you're seeing is the natural early innings of that playing out, and that is represented more so in project-based businesses around cloud advisory, cloud application, migration, and advisory services. So, consulting is leading the way, but to me, that's the tip of the arrow that's going to lead then AMS, and then eventually as that matures, our GTS managed services going forward.

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

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

Yes, thank you for the question. You talked a lot about the very strong transactional performance in the quarter, I think better than your expectations. Is there a risk that that pulled forward any revenue from 2020? And I think you talked about 4% to 5% revenue growth on your August call for 2020. Is that something we should still be thinking about? And then on cash flow, I know a number of people have asked, but maybe you can just draw a bridge between this year and next year. You're up about $0.5 billion. I think you've said Red Hat alone will contribute $0.5 billion. That implies that everything ex-Red Hat is flat despite the fact that margins appear to be going up and you seem quite confident in some of the businesses. So, maybe you can also just help with that bridge as well. Thanks so much.

Thanks, Tony. Appreciate the questions overall. Let me try to take each of these, and piece parts. First of all, fourth quarter, yes. If you dial back 90 days ago, we talked about our seasonality in our business and we were looking for a transactional quarter that would take our sequential growth up about $3.5 billion to $3.7 billion, and we achieved above that high-end. Now, truth be told all transparency, currency got a little bit better in the quarter, but even with that, we still beat the high-end of our guidance overall, and most importantly returned IBM back to revenue growth. Now, when you look underneath the transactional performance, I would tell you, one, our mainframe, we're off to a normal cycle here in the quarter. We had a very good start. Our first full-quarter, grown 63%, highest MIPS ship in history. So, I would tell you that less about a pull-forward from 2020, that's kind of normal cycle. And when you get underneath software, we've got good momentum. We spent a lot to invest and modernize our software portfolio, containerized our offerings, make them cloud-native, and optimized and OpenShift with Red Hat to play out the synergistic value of IBM plus Red Hat, and I think we're seeing very good momentum in adoption in our Cloud Paks here in the fourth quarter. The only area I would call out, and we've talked about this many times, and that is our transaction processing platforms. We've run mission critical workloads on our systems for our clients, it's high value for our clients, it's high value for IBM. And there’s always volatility in that portfolio on when clients choose to commit to our platform for the long-term. And you saw in the fourth quarter, we actually did better than our internal expectation. So, we're taking a prudent view of that in 2020, but I think that's another instantiation of the innovative value we bring to the marketplace with our systems offerings overall. So that's what I would say with regards to your first question, I'm trying to remember all of them. Let me go to free cash flow. Very important. We said approximately $12.5 billion, and when you look underneath that, yes, during the Investor Day, we said over the next two years, Red Hat and IBM will deliver $1.5 billion of free cash flow. By the way, that Red Hat will be free cash flow accretive in year one, and we are well on our path for that. So, when you look at the dynamics of our free cash flow, it's really in a couple of different buckets. A couple of headwinds. A couple of tailwinds. On the tailwind side, we're going to have operational profit and we're going to have Red Hat contribution, all-in, net of incremental interest expense, retention, etc., will be accretive in year one. On the headwind side, we are going to invest. In 2019, our capital we were driving a balanced capital allocation process, driving efficiencies out of that, that will wrap in 2019 and we will have a headwind in CapEx and the investing in our business, and we will also have a headwind in cash tax overall. And when you take a look to your last question around revenue, I would tell you right now, we said it in August that Red Hat – IBM plus Red Hat together would deliver 4 points to 5 points. When I look at where the current estimate is in consensus in the Street, I think the Street is pretty reasonable. It's 3% overall, you add at constant currency, with the headwind on the currency to stronger dollar, and you look at our divestitures, we're at mid-single-digit growth. So, I think the current estimates out there are reasonable.

Great, thanks. Can we go to the next question please?

Our next question comes from Amit Daryanani with Evercore ISI. Your line is open.

Thanks for taking my question, guys. I guess, Jim, when I look at the calendar 2020 EPS guide, in the past, you kind of talked about how does the contribution fall out for Q1 and the first half broadly on an EPS on rate basis. I was wondering if you could just touch on – does Q1 account for 17%, 18% of full year's EPS again, or does that now change a little bit with Red Hat? And then secondly, on the tax rate, just so I get this clear, the delta between the 8% tax rate that you're guiding for versus the 11% and 12% that people had in the models, that's essentially all the discrete benefit we get in Q1. Is that fair?

Yes. Thanks, Amit. I appreciate the question. And let me take each of them. Just quickly, net, you're right. On color of first quarter, it is a little different, just given the Red Hat. And if you go back to how we were transparent and hopefully everyone appreciates this as I go out and talk to investors, we've given you the deferred revenue impairment charge for the first four quarters after the closure of the Red Hat transaction, but really when you look at our first quarter, first on EPS. We expect EPS from SKU perspective to be between 14% and 15% of the full-year. Underneath that, that is basically on our historical trajectory, less the Red Hat deferred revenue impairment, which as we told you is about $400 million. So, pretty normal SKU, taking into account the Red Hat deferred element. In terms of revenue, we look at revenue and we see – again, can't predict currency. We're calling currency between a small impact to about 1-point impact right now, all that varies depending on our geographic and product mix, but we're seeing right now at a constant currency level, accelerated growth of about half-a-point here from fourth quarter to first quarter at constant currency. And when you take a look at tax rate, very good question. We printed in 2019, 8.5% all-in. We guided pretty much right between that, 7% to 9% overall. That does include discretes as we're trying to give you increased transparency and what's in our expectation, but very important to note, is I talked about we will be taking structural actions to reposition our GTS business from a cost competitiveness perspective in light of what we're seeing in the marketplace. And unlike last year where we had a funding event with regards to a gain that offset a charge, this year we're taking a charge and we're going to absorb that through the return of that. So, we really don't see a benefit overall, as we go forward.

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

Next, we will hear from Katy Huberty with Morgan Stanley. Your line is open.

Yes, thank you. Two quick questions. First, Jim, you mentioned the possibility of taking structural actions in GTS this year. What might that entail? And then back in August, you had outlined about $1.65 billion of potential revenue synergies post Red Hat. Any context around how much of that you have captured? Should we think about the 4-point acceleration in Red Hat pro forma growth as signaling the type of revenue synergies that you've been able to capture? Thank you.

Yes, so let me take the second one first, and we'll talk about synergies. So, obviously as I stated upfront, we're very pleased with the first six months here of bringing IBM and Red Hat together, and I think you could see based on the performance in the acceleration that we are truly better together. We're delivering the synergistic value to our clients overall. The best way, when I look at it, first of all, the accelerated revenue in Red Hat, up 24% year-over-year is one instantiation. The second, and I know many of you out there have been writing and have different models of trying to figure out what's IBM's organic revenue number and so forth, and I've been spent a lot of time with our investors. And let me give you the way we look at it and how we're managing to ensure that we drive the synergistic value of the technology architecture decisions we're making and the go-to-market leverage of our scale and large enterprise presence, which gets at your $1.6 billion-plus of synergistic effect. When we look at our business overall, we're looking for the lift in the growth in the acceleration of our overall software business. And when we look at the operational performance of this segment, we look at it on an all-in historical normalized basis. And at that level, our software growth accelerated all-in to 3%. Now, what does this reflect to your question? It reflects in my opinion, the true demand of our software demand from our clients, including Red Hat. Then adjusting out the deferred revenue impairment impact and Red Hat's stand-alone revenue last year. So, when you look at what we talked about in Investor Day, we talked about sell more Blue IBM and we talked about sell more Red. The sell more Red was our global presence and our scale to accelerate Red Hat overall. And as I said in the prepared remarks, we're seeing a great progress. We had 21 deals above $10 million, up 2x year-over-year, and over half of those deals were large IBM enterprise clients. So, we are seeing the instantiation of the leverage of the IBM side. And around sell more IBM, I just told you about accelerating software revenue. We have now over 2,000 clients on OpenShift and Cloud Paks, and around services, we've signed hundreds of services Red Hat engagement deals overall, including several design wins in network cloud providers around 5G that will play out as we go through 2020.

Great, thanks. Can we go to the next question please?

Our next question comes from David Grossman with Stifel Nicolaus. Your line is open.

Thank you. Good afternoon. Jim, can you give us a little better insight into the specific issues that are impacting GTS, including the bookings performance? And what underlies your confidence that growth should improve as the year progresses given that the GTS turnaround really, truth be told, is probably eight or nine quarters in already and taking longer than you anticipated?

Okay. David, thank you very much for the question. And let me start with providing some overall context, because I think it's important to share what are we seeing in the market and then how that informs our actions. As you heard in the prepared remarks, we printed down 4%, consistent with our expectations and what we talked about 90 days ago as we're experienced lower client base business volumes, but it's important to note, GTS, one, has the industry-leading market share position, two, has the global footprint and scale, and three, most importantly has a very integral role into the integrated value proposition of IBM overall as we run the mission critical workloads for many of our clients overall. And by the way, you see that playing out in our cloud-based performance in GTS, where over the trailing 12 months, we got over $8.5 billion book of business that's growing double-digits, and you heard the significant wins we had in the quarter, Broadridge, Banco Sabadell, Bank of America public cloud, in addition to several Red Hat wins, including what I just said about some design wins with network providers, but I'll tell you what we're seeing in the marketplace, David, to your point is clients are making architectural choices. They are embarking on application-led transformation. And we see this opportunity really playing out as I said earlier, in project-based services, the advice, the build, the migrate, which is very aligned to our GBS business. And by the way, that's why we feel pretty confident in where we ended 2019 and our opportunity in 2020 around GTS. Now, if you look at – as client adoption matures and it moves through the advisory phase and the application modernization phase, this will naturally extend to our GTS aligned managed services phase, which should scale up over time. And that's why I said, more of a second-half play as we go forward. So, in-light of that, what we're seeing in the marketplace, we are going to take aggressive actions around our GTS business model. We are going to reposition this business for hybrid cloud investing jointly, integrating GTS and GBS offerings around advise, build, move and manage, we are creating a building skills and investing, and where we see the growth right in front of us, that's starting to scale around cybersecurity management, trust and compliance services, multi-cloud management, and of course managed services around OpenShift. And second, we are going to integrate our go-to-market with GBS and our global account teams at the large enterprise level. We're going to take these integrated offerings, leverage now the integrated value and breadth of IBM that can play across the continuum as clients move to journey to the cloud. And we're going to go drive that hard. And in addition, I would tell you, we are going to improve the cost competitive structure of this business with the actions we're going to take here early in 2020.

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

Next, we will hear from Jim Suva with Citigroup. Your line is open.

Thank you very much. Everything you talked about totally makes sense and [jives]. And I have one question and it's probably because I'm just definitely not the smartest one out there. And that's on the signing’s numbers. That number appears, if my number looks right in the calculations, that it was down year-over-year. Are there some features going on, like maybe larger contracts rolling off, or something with timing we should be aware of, or at some point, shouldn't that revert to be positive or if not, why? Kind of what's going on about why everything else is going so well, but the signings number just looks like it just didn't materialize to be up?

Sure, Jim. Thanks for your question. I appreciate it. And no, you got the numbers right. So, let me talk a little bit about signings overall, and more importantly, as I've always said before, signings vary, they're not all equal, how they impact backlog, how they impact realization. But if you look at our signings overall, we delivered $14.4 billion. I would tell you internally, that was actually above our expectations. Why? To your point, we were coming off of a very difficult compare last year. Signings are down 9% overall. And when you look underneath it to my point about all signings are not equal, and you break out large deals from smaller deals, and let me just use $100 million as I've been for the last few quarters here, our large deal signings greater than $100 million were down 34%. That was coming off of last year where we had 19 deals above $100 million, predominantly in our GTS base of business, of which many of those were natural extensions and not new logos. That's the point about signings not being equal, but our smaller deals, less than $100 million by the way, which is still big, were up double digits, both for the quarter and for the half, and across both businesses, GTS and GBS. Back to David Grossman's question, I think you're seeing the natural evolution of the early innings of this journey to cloud as we move forward. Now the interesting thing is, underneath, we posted over $112 billion worth of backlog, and that backlog was actually up $5 billion quarter-to-quarter. That's one of our largest sequential 3Q to 4Q backlog increase, by the way, with and without currency that we've had in quite some time. So, I would tell you, net answer, tough compare, large deal focus, but the health of the underlying portfolio growing substantially double digits both GTS, GBS, in less than $100 million.

Okay, great. Thanks. Sheila, let's take one last question.

Thank you. Our last question comes from Jeffrey Kvaal with Nomura Instinet. Your line is open.

Yes, thanks very much. I would like to clarify a prior point and then throw out a broader one. And the clarification is, if you could go once again through the delta on EPS given the tax rate, it does seem as though many of us had expected 3-or-so points higher on the tax and that works out to be $0.40. So, that's a big increase in OpEx. I just want to make sure I've tied that correctly. And then a bigger picture, to what extent do you think any of the – or how much of the changes in the macroeconomic picture affected your outlook for 2020 and that could include trade or what have you? Thank you.

Thank you, Jeffrey. Appreciate the question. On the 2020 guidance, reiterate it just to make sure there is absolute clarity here for everyone. When you look at our tax rate, our tax rate in 2019, 8.5%. Our tax rate in 2020, we said 7% to 9%, pretty much right in the middle. So, tax year-to-year is not a benefit. We're growing operating EPS year-over-year. When you look at that tax rate – and I'm not going to talk to what each of you have in your own model, but underneath that we, as we said, are going to take structural actions to reposition our GTS business for the hybrid cloud world. Those structural actions are going to flow through to profit. And when I said those structural actions upfront, I said, if you look at the last few years, we are going to be at the high-end of that range, of that total charge. There is no coverage for that charge. We are going to absorb the return in our fiscal 2020 and still grow operating earnings per share to at least $13.35 coming off of what we just finished at $12.81. So, that's the first question. Was there a part two? Macro environment. I would tell you, Jeffrey, if you ask me from 90 days ago to today, we've obviously had some clarity around some of the uncertainty was out there with regards to at least Phase 1 on trade, around Brexit, and a few other areas. I have always said, when you have high value innovative technology that you can bring to market that creates differentiated competitive advantage for your clients, spending will occur. If anything – and by the way, I don't think this is a change we've seen throughout 2019, CFOs that I talked to, everyone is focused on more so productivity, ROI, and predictability of spend. Everyone is trying to lock in what their spend rates are as they move forward, but when you have strong technology like the mainframe that brings differentiated value, people are buying that to actually deliver differentiation for them in the marketplace to win. So, as always, let me make a few comments to wrap up the call. 2019 was an important year for IBM. We had a good end to the year and we're pleased with the strength and the positioning exiting the year. The acceleration in Red Hat, strong adoption of our Cloud Paks, growth in our cloud-based services, all validate the actions we've taken to position us for growth in 2020. So, I want to thank all of you for joining us today and we look forward to continuing the dialog.

Sheila, let me turn it back to you to close out the call.

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